Microsoft's mobile missteps a persistent investor concern

Microsoft has compelling product cycles to ride with Windows 7 and Office 2010, but the long-term picture is worrisome given the software giant's lack of mobile success, according to an analyst.

In a research note, Barclays Capital analyst Israel Hernandez cut his price target on Microsoft to $32 from $35. Hernandez doesn't see any big earnings risk, but notes that Microsoft shares have underperformed both the Nasdaq and S&P 500. Microsoft is now less valuable than Apple based on market cap. The surface concerns are obvious: Europe, decelerating PC growth and another reorganization so the company can get its entertainment and services unit in order.

However, Hernandez says there's something deeper going on. HP's acquisition of Palm, Apple's iPad and the success of Android all ding Microsoft's platform at various levels. From netbooks to mobile to tablets, Microsoft alternatives are everywhere. Simply put, Microsoft better get Windows Phone 7 right or it will have long-term concerns ahead. What happens if Microsoft doesn't get its 30 million Windows Phone 7 users? Here's what Hernandez had to say:

We view the mobile/tablet/smartphone market as a strategic imperative for Microsoft, not so much for the immediate revenue opportunity but more so because of the potential competitive impact on the core Windows franchise over the long-term...In our view, the inroads that Apple and now Google have made with smartphones and tablets have created a scenario whereby a new generation of consumers is increasingly looking beyond Windows for their basic computing needs, especially with more and more content and applications available in the cloud and accessed through a browser, obviating any need for a Window-based machine. We are seeing this already with Apple’s steady market share gains in the PC market, a trend which we see as accelerating as iPhones and iPads becomes more pervasive, with iPads already cutting into the netbook market.  While we do not want to overstate the market share issue, we believe the threat posed by these new platforms is having a major impact on Microsoft’s valuation today.

When Hernandez talks about sentiment he's referring to Wall Street as a discounting mechanism. Microsoft may have a strong earnings cycle ahead, but investors are concerned about whether the company can be a player in hot markets.

These concerns also persist at Microsoft, which reorganized its entertainment and device division. To wit:

• As the Microsoft org chart turns
• J Allard's goodbye note: 'No chairs were thrown'
• Beyond Bach's departure: What else changed today at Microsoft?
• CEO Ballmer's e-mail on Microsoft's entertainment and devices shake-up
• Who will be Microsoft's next 'boy genius'?

The big question is whether Microsoft can give the innovation cycle a run in the mobile market and entice consumers to try Windows devices.