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

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?
Written by Zack Whittaker, Contributor on
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$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.)

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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.

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