So, what is up with Microsoft stock? It sure isn’t Microsoft!
- Are Microsoft’s products not performing?
- Are Microsoft’s Gross Revenues down?
- Are Microsoft’s Profits suffering?
- Microsoft’s Windows 7 sold in excess of 240 million units in its first year – becoming the fastest selling OS in history. Windows Phone 7 has just been released and lauded as a major step forward for mobile phones. Microsoft’s revolutionary Kinect for the XBox 360 sold over a million in just its first week.
- Microsoft’s Gross Revenue for FY 2010 was about $62.5 Billion. FY 2000 was about $23 Billion.
- Microsoft’s Net Income for FY 2010 was about $19 Billion. FY 2000 was about 9.5 Billion.
So what’s going on? With such strong sales, and an increase in Gross Revenue of 271% and and increase in Net Income of 200%, why hasn’t Microsoft seen a corresponding increase in its share price? The reason is fear!
The stock market is no longer run by the knowledgeable few who do elaborate research and determine fair market values for their offerings (perhaps it never really was). The stock market today is run by the small investor, the mom and pop investors who play with the 401k’s and their IRAs, buying and selling as they search for a fast buck or great opportunity. In this market, your actual earnings potential means less and less, while your “street cred” means more and more.
In other words, in this market, your “flash” means more than your “substance.” Microsoft has never been a “flashy” company. It has shied away from making overt claims and promises and tried to deliver solid products to the marketplace year after year. For this reason its stock price has remained moribund within the 2000 levels of $25 – $30/share.
In the last decade Apple and Google have both done an outstanding job of increasing their “street cred” and thus their market caps. Apple has led the world in internet music with the iPod and iTunes. Today its iPhone is a market leader with about 28% of the mobile phone market, accounting for about 42% of Apple’s gross income.
However, there are problems in Apple’s outlook which need to be considered. First, this dramatic percentage of sales being tied to a single product is worrisome, especially in such a hot marketplace. This last quarter Google’s Android based phones accounted for 27% of all smartphone sales, while Apple’s iPhone slipped to only 23%. If this trend continues, it could put some serious hurt on Apple’s cash-cow.
Also, how much of a cash-cow is the iPhone really? Delving into Apple’s accounting practices shows that Apple recognizes all of the revenue “up-front” for the iPhone – even though, as part of its revenue sharing programs with its partners, it could take up to two years (the standard contract time-frame) to actually receive this revenue. This methodology seriously skews Apple’s revenue models to the positive.
While Google’s Android phones are just now beginning to gain market acceptance, the mainstay of their business has always been internet advertising. Google’s FY 2009 Gross Revenue was about $23.6 billion. Of this amount, about $22.9 billion (about 97%) was from advertising. This could turn out to be a significant Achilles Heel for Google as the value of web advertising comes under scrutiny and newcomers such as Facebook begin to grab even bigger slices of a potentially shrinking revenue pie.
Microsoft’s problem is that they are ubiquitous and (frankly) boring. They are the “old (mostly) reliable” company. However, they are also significantly more diversified than either Apple or Google and as such, better positioned for future volatility. Microsoft has its hands in many, many pots – perhaps this is the problem. Is Microsoft a “Jack of All Trades, and Master of None?”
As we go forward with this Blog we will further examine this observation and see what recommendations we can put forth to address this in the ever changing marketplace for mindshare.
In the meantime, the facts are quite clear and striking. Microsoft represents a tremendous value in todays stock market; one which is sure to bear fruit for the patient amongst us. Additionally, market managers are beginning to speculate that Apple’s shares may be overvalued. While no one can predict the future (especially not this blogger) – keeping a careful eye on the underlying metrics is a good way to catch the upside. Relying upon emotion and market hype, while good in the short-run, can catch you in a crash as reality steps in again.