Microsoft Corporation (MSFT), Intel Corporation (INTC): Warning Signs for Long-Term Investors?

While the capital expenditure on cloud itself is an investing activity, it ends up in the income statement as depreciation. The nature of the cloud offerings is such that infrastructure expansion is constantly required to serve growing customers. Therefore, the continuous infrastructure requirements will result in higher depreciation and reduce margins in the long run.

Last Shot

The PC industry has not been idle while the handhelds take over the market. They have tried a number of methods to improve declining PC sales. These methods included lowering margins (by reducing product prices), Windows 8, Surface tablets, ridiculous market budgets, Ultrabooks etc., but none of these methods have worked. The entire industry is now hoping that Intel Corporation (NASDAQ:INTC) Haswell processors can save the sinking ship. The recent PC industry statistics from Gartner show that OEMs are building up Haswell inventory. This inventory buildup is one of the major reasons behind the high decline in second quarter PC sales.

Microsoft is focusing on improving its cloud offerings with significant increases in capital expenditures. This is the only way it can make up for the massive declines in the Windows and Microsoft Office revenues. The shift to Office 365 is severely affecting the revenues from the consumer segment of Microsoft Office. The cloud offerings inherently have lower margins, and revenue growth from these offerings will have a long lasting effect on margins.

The Windows segment is suffering from declining PC shipments. Windows 8 and Surface tablets have been unable to stem the flow. The PC industry is now expecting Intel Corporation (NASDAQ:INTC)’s Haswell to instigate a significant PC upgrade cycle. If the new Haswell processors are a success, Microsoft and Intel will reap the benefits. Therefore, Investors should ‘hold’ Microsoft until the cloud impact on margins and the Haswell impact on the PC industry play out.

The article Warning Signs for Long-Term Investors? originally appeared on Fool.com and is written by Mohsin Saeed.

Mohsin Saeed has no position in any stocks mentioned. The Motley Fool recommends Intel. The Motley Fool owns shares of Intel and Microsoft. Mohsin is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.

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