Microsoft Corporation (MSFT): The Picture May Not Be Pretty, At Least For Its Stock Price

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Microsoft Corporation (MSFT)Will this stock finally break free of the range bound shackles its been tied down to? Microsoft Corporation (NASDAQ:MSFT) recently closed above $33 for the first time since the Great Recession, and is starting to break out of the $25 to $32 cycle it has been trading in for the past decade. Is this the beginning of a structural change in how Microsoft Corporation (NASDAQ:MSFT) trades, or just a brief run up to be met with a hard landing?

Hopes stuck in the Cloud(s)?

News just came out that its cloud service Azure just reached $1 billion in sales, as subscriptions rose 48% over the past 6 months. Forrester Research sees the number of companies using Microsoft’s cloud computing services rising from 20% now to possibly 35% by  next year. Amazon.com, Inc. (NASDAQ:AMZN) dominates the market right now, with 71% of all companies currently using cloud computing services, using Amazon.com, Inc. (NASDAQ:AMZN)’s offerings. Amazon has been investing every dollar it makes right back into the business, as they pay out no dividend and don’t aggressively buy back shares.

Amazon.com, Inc. (NASDAQ:AMZN)’s cloud offering has grown like weeds: its customer base has grown by 102% YTD and usage of those services has grown by 50%. It will be hard for Microsoft Corporation (NASDAQ:MSFT) to wedge itself in, but the fact that the company is experiencing high double-digit growth in this relatively new market will help it grow, even if the PC market is “collapsing”.

The cloud is a rapidly growing industry, and both of these players can share in the growth. According to Gartner, the cloud computing industry will grow from $76 billion in 2010 to $210 billion by 2016 (right now it is at $110.3 billion). As the pie grows bigger, both stand to benefit regardless of shifting market share.

Tablets

Another area both these companies compete in is the tablet industry, along with Google Inc (NASDAQ:GOOG) and Apple Inc. (NASDAQ:AAPL) of course. Another report, this one from Strategy Analytics, shows Microsoft Corporation (NASDAQ:MSFT)’s OS with a 7.5% share in the tablet market, up sharply from zero last year.

This means that Microsoft Corporation (NASDAQ:MSFT)’s OS sold 3 million tablets in the first quarter of 2013. Apple sold 19.5 million iPads to take 48% of the market, while Android came in second to sell 17.6 million units to take 43% of the market.

That is for the Operating Systems, but when it comes to manufacturing, Amazon took 3.7% of the market (in the same time period) as Microsoft took 1.8% (per IDC). Microsoft makes more money selling its Surface tablets, but still makes a nice royalty fee off of Windows licenses (around $40).

Google Inc (NASDAQ:GOOG) has been aggressively taking up market share, and in a different study by IDC it has surpassed Apple Inc. (NASDAQ:AAPL)’s iOS in terms of market share. Google’s advantage is that it can sell tablets at a variety of different price points, even below cost, such as with Amazon’s Kindle and Fire, which is hard for Apple, which makes most of its money on the sale of the device. Plus, once it gets that sale, it generates income for a lifetime off of the Google Inc (NASDAQ:GOOG) Store, and advertising revenue from consumers using Google search.

The benefit of this rapidly growing tablet market for Apple Inc. (NASDAQ:AAPL) is that it will help push its margins, as gross margin for the iPad Mini is 40.4%, and 38-39% for the iPad, which is higher than the 35-37% expected for Apple overall. Even if iPhone sales slow down, Apple has its dominance in the tablet market to fall back onto.

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