Microsoft no longer the Windows company. Does Wall Street agree?

Microsoft no longer the Windows company. Does Wall Street agree?

Summary: Microsoft's share price has reached record highs in spite of criticism over Windows 8. Does Wall Street finally believe the Microsoft message that it’s no longer dependent on Windows?

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Screen Shot 2013-05-31 at 16.18.31
$MSFT shares year-to-date (Image: Nasdaq)

Despite Windows 8 backlash and a general decline in PC shipments, something strange is happening with Microsoft shares.

You might think that the criticism and widespread disapproval at the direction Microsoft has taken its latest operating system would have plunged the software giant's shares to record lows. Microsoft has admitted its difficulties and user conflicts with Windows 8 and is rectifying with the upcoming Windows 8.1 ("Blue") update, which will be released later this year.

Except, with Microsoft in mind, there appears to be a level of disconnect between what the wider world thinks is important and what Wall Street traders think is important.

Microsoft's shares are edging imminently close to $35 per share, which is a year-to-date increase of about 32 percent from its lowest price of $26.46 in early January.

As a result of the share price hike, Bill Gates, who owns an estimated 400 million shares in Microsoft, reclaimed the title of the world's richest person with $72.7 billion earlier in May.

Financially, Microsoft is in good health. Business-wise, it's in fantastic shape. It's only from the public's perspective that things aren't going all too well. And Wall Street has woken up to the fact that Microsoft is, at least from a shareholder and investor's point of view, stronger than it appears to be.

Microsoft isn't "just that Windows company" anymore.

Most will look at Microsoft and see it as a "multi-billion dollar, multi-national software company." Perhaps it was once. Nowadays, it's not so much. Actually, it's like a cluster bomb of financial goodness.

People should start looking at Microsoft as a "series of many billion-dollar divisions under one corporate roof." And it seems that Wall Street has finally woken up to the fact that when Windows 8 suffered consumer and enterprise resistance, investors still began to pile their cash back into the company.

Despite Windows 8, profit soared

In coming up to five months ending in May, shares in Microsoft have risen by more than one-third from the New Year. Shares are almost exactly $2 away from its highest post-millennium price of $37 per share, which was reached in November 2007.

It's a far cry away from New Years Eve 1999 when Microsoft's stock was at more than $58 per share, its highest in its 30-year history, but since the launch of Windows XP in late 2001, shares have levelled out at around the $30 per share mark.

Microsoft's shares actually began to rocket in mid-April after a non-meaningful upward saunter following the company's third quarter earnings. Everyone thought the company was going to stumble. By this point, there was no word — only rumor and speculation — about Windows 8 sales. Those figures would come days later

But then the company wiped the floor with its earnings, beating bottom-line expectations — profit soared by 19 percent — despite getting dinged by a $733 million fine issued by the European Commission following its breach of prior antitrust settlement terms.

Microsoft ended the quarter with $74.5 billion in cash — a very healthy cash reserve. It had $66 billion, or 85 percent, of its cash stored in foreign subsidiaries, leaving just $8.5 billion in cash stateside. 

In just two trading days following its earnings release, shares in Microsoft jumped 7 percent. One week later, shares were up more than 13 percent.

It wasn't just the fiscal quarterly earnings. Shares were bumped along by a bond sale that went on for the most part under the radar, just days before Apple had its own debt sale in order to finance a $100 billion capital return program for its shareholders.

Investors are clearly happy with the way Microsoft's diverse range of businesses are bringing in the money. So much so, in fact, that they're plowing more money into the company. 

Nomura Research analyst Rick Sherlund raised his price target for Microsoft from $32 to $38 this week. Sherlund said he was upbeat about a possible increased focus on "shareholder value as a result of potential shareholder initiatives." He cited Value Act's recent purchase of 1 percent of Microsoft shares by ValueAct Capital. ValueAct has been public about its hopes for Microsoft to release Office for iOS and Android as a way to grow its business.

For Microsoft, the ecosystem is pulling together. And it still revolves around Windows, even if it isn't the front-running business anymore.

Windows 8 hit the 100 million licenses sold milestone just as it did with Windows 7 three years earlier. But PC shipments are on the slide as a result of the uptick in tablet sales and shipments. (And Microsoft also missed the boat on tablets, but eventually caught up with its own Surface device, albeit coming up to three years later.)

Microsoft gets the money from PC makers in form of a license fee, but actual PC shipments stand at slightly more than half that figure. It doesn't matter to the software giant — for now at least.

Perhaps in a year's time, once the sped-up Windows release cycle kicks back into gear, Microsoft will suffer a ding in its Windows division. But by then it will be offset partially or in whole by an uptick in its cloud services, which now includes Office 365 and its next-generation business and enterprise software.

Division diversification: Microsoft's many moving machines

Those are two things that would typically make many people look at Microsoft, see that alone, freak out and pull their money while the stock isn't too low. Except, Microsoft's share price isn't that low. It's up. And it's so very close to reaching its highest post-millennium share price — a record high.

People are beginning to look at Microsoft instead as a server, software-and-services, and cloud company.

Instead of being seen as a multi-billion dollar generating technology beast with a market cap value of $291.3 billion as of market close on May 31, a number of factors — such as its diverse business range, its financial health, and its ability to spin off into different money making machines — should probably make it be seen (and likely is by traders) as a collection of smaller billion-dollar businesses.

Microsoft hasn't put all of its eggs in one basket for a while.

Microsoft chief operating officer Kevin Turner beat the diversification drum this week during an appearance at the Sanford C. Bernstein Strategic Decisions Conference. Turner told attendees: "Windows is now our third-biggest business and we have a couple of other businesses ahead of Windows."

He said the company was "pretty proud of the diversity of this portfolio." Really punching the diversity line, Turner reiterated and expanded his comments.

"We operate in 191 countries around the world and we have over 1.5 billion people that use our products every day. So it is a very global company from that perspective. But whether you slice it on customers, products and services, or geographically, we believe we have a very balanced business, which positions us well both in good times and tough times."

Just look at it. Besides its Online Services division, which was created in 2008, its divisions are spread relatively equally in terms of revenue generated. (The obvious exception is the firm's Entertainment division, which holds the Xbox and game revenue, but that's likely because of console saturation and the only just-released Xbox One. More on that in a second.)

Screen Shot 2013-05-30 at 13.57.06

Even in its smallest units, there's hope and optimism among industry analysts.

Microsoft's smallest-developed division, Entertainment and Devices, remains the second-smallest unit at the company. Generating just over $2.5 billion in revenue during the company's fiscal second quarter this year, the Xbox developing unit still managed to climb 56 percent year-over-year on new console sales, and that's still based on rumors and reports of the recently released next-generation console.

The excitement doesn't stop there for the division.

Raymond James analyst Michael Turits put a reiterated outperform status on Microsoft's stock. In a note to investors, he said the Xbox One's release later this year will "further positions [for the company] to dominate the digital living room."

Turits noted that combined with product refreshes across Windows, Office, and Server and Tools, as well as a rumoured range of less-expensive touch devices and tablets spurring Windows 8 growth ahead of the release of Windows 8.1 ("Blue"), Microsoft has "several catalysts to life sales and the stock in [calendar second-half of 2013]."

Thanks to strong recent earnings, a debt sell-off, mea culpa on Windows 8 and a subsequent exit strategy, the company at its roots is stronger today than it has been in about a decade.

Instead of looking at the company as though Windows is failing, ergo the company must be failing, investors and shareholders are looking at the burgeoning and budding potential in its other divisions.

ZDNet's Mary Jo Foley contributed to this article.

Topics: Microsoft, PCs, Windows, Windows 8, Windows Phone

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103 comments
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  • Would be nice, but no

    MS still appears to be highly dependent upon Windows.
    John L. Ries
    • Window Server any

      Most profitable area Microsoft is server software and services.
      stojozano
      • High stock price is all QE-fueled

        Fundamentals no longer matters when central banks just print money to buy stocks. This is 70's stagflation all over again.
        LBiege
        • So true

          Other than the lack of inflation.
          notsofast
      • Ya Enterprise

        A lot of enterprise are upgrading to Win 7 helping to boost their profits. MSFT's P/E ratio is 18 which is high for them. IMO they should still be selling in the high $20's or low $30's which is pretty much where they've been the past 10 years. Nothing fundamental has changed about the company. They still rake in the dough when it comes to Windows and their mobile efforts have been abysmal. There's nothing there that screams, "Buy me" in my opinion, in fact, just the opposite.
        Maha888
        • I disagree

          10 years ago, Windows and Office dominated. Server and tools were barely a blip on the balance sheet and E&D didn't exist. A lot has changed in the intervening years, not the least of which is Microsoft 'growing up' as a company, diversifying in order to sustain a global economic collapse with barely a scratch and moving into the PCv2 world well positioned to do very well.

          In short, Microsoft today is a significantly better structured, engaged, professional company that is now free to compete on business terms after almost a decade operating under DOJ oversight.

          I said it before and I'll say it again - discount Microsoft at your peril.
          bitcrazed
      • server

        That stuff still runs on windows. Make windows go and this will go too.

        Everything Microsoft does, except few niche things is based on windows.
        danbi
        • Windows and Bloggers!

          Truly, Windows is not only what we run on the desktops and laptops, but what we also run on the servers. Hence, Windows 2003, 2008 and 2012 servers.

          Therefore, no matter how much some bloggers distort the facts, Windows in is the king of operating systems and Microsoft heavily depends on it. Hence, the raise of Microsoft shares is an acknowledgement of the strength of Windows OS.

          I bet reports of Q2 will present another unavoidable fact: Microsoft sold more copies of Windows 8 OS than Apple OS ever sold since 1999.
          Wonder.man
          • Whatever

            Microsoft sold more copies of Win8 OS than Apple OSX ever sold, so what??
            GM will sell way more cars than Mercedes will this year. Enjoy your Chevy Malibu, I'm loving my Mercedes CLS Class.
            Maha888
          • Huh?

            Mercedes require constant maintenance, far more than a typical US or Japanese car. Unless you're claiming OSX is expensive and requires a lot of expensive maintenance, your analogy is awful.
            notsofast
          • Did you really say that

            With this analogy, you just said that maintaining Mac is expensive than Windows PC. I think Apple just started hating you.
            Ram U
          • Your analogy is not just a failure re maintenance costs...

            in order for your analogy to be accurate, Apple OSX would have to cost several times more than Windows straight off of the assembly line. If it were true that people were willingly paying several times extra for Apple's OS because Apple is sooo much better, but most of us plebes are stuck with Windows because it is more affordable, maybe you'd have an analogy. But, sorry, you don't. We have comparable products competing for the same markets, and one is still managing to vastly outsell the other.

            Are you instead arguing that it is irrelevant that Apple sells far fewer copies than MS regardless of the comparable prices because Apple is still more prestigious? I'm sure many would disagree that Apple provides superior quality, and certainly every single shareholder would disagree about the wisdom of downplaying market strength.

            As for prestige products and overall profitability, most prestige products make less profit. If you look up Chevy's profits, vs Mercedes, I doubt you could say Mercedes is in a better financial position. This may be a bit off topic (since it does not apply quite as well to cars), but to correct a common misperception: Costs of production for exclusive products are usually so high that they are rarely profitable. Where the motivation for creating exclusive products usually comes from is pure marketing - e.g., creating a buzz about a particular fashion label. Gucci, etc, have three levels of product: the unprofitible stuff that is ultra-exclusive and usually given away to celebrities because it is the best way to make use of a product that won't make them any money; the stuff that is mass marketed, indistinguishable from, and produced on assembly lines just like their cheaper competitors like Levis and Wrangler; and a level in between where they make some profit, but nothing spectacular, because, again, they have to create that buzz and give some people who really care about such things some illusion of exclusivity. When most people buy Gucci, they are buying the drama generated by seeing Angelina wear a far different, costly, unprofitable, tailor-made design, and are allowing themselves to be ripped off in order to impress shallow people obsessed with labels.
            hmmm,
          • Apples and oranges

            Windows is a generally available operating system for generic x86 and x86-64 hardware, as well as OEM ARM devices.

            OS X and iOS are offered by a single vendor on their hardware only, and are not available as general purpose operating systems.

            How is this comparison relevant?
            Mac_PC_FenceSitter
  • Microsoft is headed for the same brick wall in there stock.

    With Windows 8 "force desktop user to use new UI" approach Microsoft hit a brick wall. Next quarter when they don't have profits the deferred from Windows 8 and some Game division pre-sales. They are going to post a large loss. Right now the market is swinging up as it gets ready to drop. This becoming more and more common for tech stocks (Apple, Facebook, etc.). Speculation drives tech stocks before they deflate.
    alex_darkness
    • I see bias there

      You tried to be non-bias here but I see your bias towards Google. Why didn't you add Google in your Apple, FB and etc. list, or is Google just an etc. company? You are not clear. And your shill towards Google is showing up. Just saying.
      Ram U
      • Maybe because Google Stocks are in good shape

        Google Inc
        NASDAQ: GOOG - May 31 4:00pm ET
        871.22+0.46‎ (0.05%‎)
        DancesWithTrolls
        • You didn't read today's Wall Street's caution it seems

          There is a downside risk of 40% with GOOG. It may be darling like AAPL in recent past and as MSFT, INTC and IBM were once. In my opinion Google will go down to 500 in the next few years like Apple went down to 400 all the way from 700+.

          Good thing is you are not financial advisor, we already have jokers working in the Wall Street, and we don't want trolls who also dance doing the same.
          Ram U
          • but

            If he dances with an surface and keyboard, it's ok.
            danbi
          • I didn't say that. Please don't put words in my mouth.

            I know you can troll much better than this.
            Ram U
          • All these share price stories make me laugh

            When I read the comment section - that the usual suspects Re for and against products, ignorant to the fact that whether or not 90% or people love or hate a product, whether this or that is better, whichever platform they love... All have no bearing on stock price.

            I'm sure that that's going to anger a few, but that's finance. Just look at apple - making more money than ever before, companie's stock halved in value - has the compsny? No. Massive cash reserves and increasing profits. It's perception of growth - 700 a share was too expensive, everyone knew it, but it works on the principle it keeps getting bigger. One faulter and it collapses as everyone tries to get out before it falls down.

            MS are perceived to be bottoming out - that you're getting it on the cheap before it grows again, or they assume the company is strong enough to survive the bad press, and that that bad press is suppressing the price.

            No market maker cares about the company, it's products, they only care what other people will think it's worth in the short to medium term.

            Think roast dinners - your brother wants to swap his roast potato for your Yorkshire pudding. A mathematically equal swap is one for one. Reality is there are lots of potatoes and few yorkshires, so a fair swap may be three potatoes for a Yorkshire. Your love or hate of something then affects your perceived worth of the items - if you hate yorkshires and love roast potatoes, you may accept 1 roast for 2 yorkshires.

            None of this matters. On the markets no one cares about any of those factors. First and formost is this one simple question; "if I give you a Yorkshire pudding for a roast potato now, how many yorkshire's will I get for that roast potato later?" They sure as hell have no interest in eating the dinner.
            MarknWill