When you look at the portion of your portfolio that’s devoted to tech companies, what do you see there? If you’re holding onto shares of Microsoft Corporation (NASDAQ:MSFT), you need to rethink that part of your portfolio. During the last 12 years or so, the tech giants such as Google Inc (NASDAQ:GOOG), Amazon (NASDAQ:AMZN) and undisputed champion Apple Inc. (NASDAQ:AAPL) have had an amazing run, delivering astonishing returns. Microsoft, on the other hand, hasn’t done much of anything. Here are some things to consider when it comes to determining why Microsoft’s performance has been so lackluster of late.
Perhaps the biggest problem at Microsoft Corporation (NASDAQ:MSFT) is that it no longer innovates the way a tech company must in order to thrive. Think about the revolutionary products that have come out of Apple in recent years – the iPhone and the iPad being the most notable. And Google Inc (NASDAQ:GOOG) continues to come up with disruptive technologies that turn the tech industry upside down and inside out – including its developing driverless car and its augmented reality glasses. Microsoft, by contrast, seems to settle for producing knockoff products and technologies. It’s simply not ahead of the curve. What position it does have is based largely on the widespread adoption and use of its OS in the vast majority of computers worldwide.
What doesn’t make sense is that Microsoft Corporation (NASDAQ:MSFT) obviously has a huge bank account – more than enough to fund plenty of R&D, along with opportunistic acquisitions. As a total percentage of revenue, it even outspends its competitors on R&D. What it can’t seem to do is match the great returns on investment in its steep research and development spendings that companies like Google and Apple achieve.
Lately, Apple Inc. (NASDAQ:AAPL)’s R&D expenditures as a percentage of total sales have dropped significantly in the last few years to its current level of under 3%, but its product launches nearly always hit the mark in spades. Amazon.com, Inc. (NASDAQ:AMZN) is another company that has managed to do very well on the innovation front while spending only 8% on R&D. Google is spending more like 13% of its sales on R&D, while Microsoft Corporation (NASDAQ:MSFT) leads the pack at nearly 14%. But what does it have to show for that? Very little, I’m afraid.
A tired strategy
On another level, Microsoft’s lack of first-time innovation is an intentional strategy. It means rather than making an effort to become the first one to launch a new product, it intends to be the first to actually make good profits on its proprietary versions of a technology or product developed by its competitors. It’s a strategy that made sense when Microsoft Corporation (NASDAQ:MSFT) had a huge size and strength position relative to its peers.