The software still counts.
A fresh 10% decline in Microsoft last week gave everyone the chance to wonder if the valuation on MSFT was just too compelling to overlook despite their seemingly dim prospects.
Many investors are thinking and some analysts are suggesting that buying the stock at these levels will give them attractive returns. Just give Microsoft the chance to turn the crank a few times on product development and delivery, make some acquisitions and the multiple will expand from from current depressed levels. After all this is a very profitable company with huge cash reserves and a massive installed base of users who can not easily migrate to another platform.
Windows and the Office Suite seem to be pretty safe notwithstanding inroads from Apple and Google. Apple’s success will probably double their market share to 6%, say 10% if you want to be aggressive. Firefox is doing extremely well but IE continues to have 70% share. Gmail is growing way faster than Hotmail but still has only 10% as many users.
All that said we have seen these tempting situations end up in disappointment. It’s been hard to recover once on the wrong side of the technology curve, particularly in software. We wrote in an earlier report that given the years of development effort required for Mozilla to recast Firefox, it might require a decade or more for Microsoft to recast their own software content, at least at the application software layer.
It feels like Microsoft is still in a secular downtrend but money can be made by picking spots. Given their installed base the potential for a Vista/Office upgrade cycle the stock will probably see a decent rise at some point. To us all these are opportunties to buy and sell the stock but not enough to suggest a secular uptrend.
Investors have plenty of reasons to be skeptical of where the $2.5B will be spent. Many acquisitions in the past may not have been total failures but didn’t seem to change much. Many Microsoft products outside of the core Windows, IE and Office have faded from memory.
We played with Windows Live and came away pretty disgusted. What we created easily and simply in Google was slow, non-intuitive and burdensome in Windows Live. When Steve Ballmer jokes that his kids don’t use Google or iTunes we feel that it speaks volumes about the real problem at Microsoft. These products represent the new baseline for what people expect. If you don’t know them well, how do you do a better job?
Ray Ozzie seems to be the face of future innovation at Microsoft these days. So far we are pretty unimpressed. We have used Lotus Notes and Groove. Both definitely had visionary elements in their functionality but operationally left a good bit to be desired. In fact Groove reminded us of Outlook in terms of the vast resources it consumed relative the functions delivered. (We don’t use any bloated products anymore in this shop…) Ray has been a trooper and introduced concepts like the Live Clipboard that some like, we think it treats the symptom and not the disease.
From a pure numbers standpoint it would seem that Microsoft at these prices is a trading buy (we did purchase stock on the dip but would sell it at $27.) Beyond that the question to us remains open. Because the installed base is so huge and has limited ability to migrate there are plenty of reasons to believe that financially Microsoft can rebound and give investors a return. But will it seem like a CA-style return or something more inspiring?
Maybe the company will get aggressive and acquire a handful of companies that show some clever thinking about leveraging their position?
Maybe there will be a change in the kind of insular brute force thinking that comes from Steve Ballmer?
Either one of these could be a real sign of encouragement for the longer term but without them it’s hard to expect a major change in the culture and operating style of the company to fit a true Web-focused approach to software and computing.
Everyone has their 2c on Microsoft but since we took the time yesterday to put our hands on Windows Live, we figured it was worth noting our opinions here. If Windows Live is the flagship of the USS Microsoft it’s riding pretty low in the water.
We’d love to see some comments on this one!