Things Aren’t so Bad at Microsoft Corporation (MSFT)

Microsoft Corporation (NASDAQ:MSFT) fell 11.4% after the company issued its quarterly earnings report. Such a move is rare for a stock with capitalization over $260 billion. Clearly, the earnings report had disappointed investors. However, sometimes such moves are exaggerated and present a buying opportunity. Is this the case with Microsoft Corporation (NASDAQ:MSFT)?

What’s bad

Let’s examine what scared investors. Microsoft has missed analysts’ estimates on both earnings and revenue. There were two main sources for the miss: the softness in Windows revenue and a $900 million charge related to Surface RT inventory adjustments.

Surface RT has looked dubious many observers. Now, it is clearer than ever that it looked dubious to potential customers, too. Microsoft Corporation (NASDAQ:MSFT) has cut $150 from the price of Surface RT, resulting in a write-off from inventory. The company has ultimately realized that, at this price tag, it just can’t compete with Apple Inc. (NASDAQ:AAPL) and Samsung.

The tablet field is getting crowded, especially considering the number of Chinese producers throwing Android-based devices at the market at low prices. This is not very important for the U.S., but it has a significant impact on emerging markets. The demand for higher-end products seems to have slowed down. Apple Inc. (NASDAQ:AAPL) recently cut iPhone orders by 20% due to the slow demand in high-end smartphones. The company has updated neither the iPhone nor the iPad for a while, and this is weighing on the stock price. Despite the fact that Apple trades at a cheap 9.77 forward P/E, the shares remain in the downtrend. The stock is down 19% this year, and clearly needs a boost in the form of fresh products. However, those products are not going out until this fall. Many investors are sitting on the sidelines to see what happens when they hit the shelves.

The cut in the Surface RT price looks like a desperate move from Microsoft. The company has produced those tablets, but nobody is buying them. Surface RT write-offs had a $0.07 impact on earnings, eating more than 10%.

While the Surface RT issue is clearly unpleasant, it is not the core of Microsoft Corporation (NASDAQ:MSFT)’s business. What’s much more important is the Windows segment. Windows was hit by the combination of weak PC sales and Windows 8. Microsoft execs could state that Windows 8 is the new experience, but unless customers agree with that, the train would not go further. Some even blame Windows 8 for weaker PC sales, but I think that’s an exaggeration. Microsoft expects that consumer PC sales will drop by 20%, which is a huge number.

What’s good?

Microsoft Corporation (NASDAQ:MSFT) is performing well on the enterprise front. Enterprise Services revenue was up 9%. SQL server revenue grew 16%. Microsoft established a partnership with Oracle Corporation (NYSE:ORCL) in order to gain more customers for its Windows Azure platform. Windows Azure has grown its enterprise customer base by 25%.