Microsoft Corporation (NASDAQ:MSFT) investors yell all the time about how the stock price has done nothing in the last 12 years, and generally put the blame squarely on the shoulders of CEO Steve Ballmer. That may be an absolutely unfair accusation, but Microsoft is nonetheless in the most precarious position it has been since the company began.
Don’t Blame Ballmer
Under Ballmer, earnings have steadily risen. The company has paid a rising dividend, and has continued to accumulate cash on its balance sheet.
Unfortunately, during the dot-com boom, investors put way too high a valuation on Microsoft’s stock, and it has since adjusted to more appropriate levels. Ballmer didn’t do a horrible job at building value; investors in 2001 did a horrible job valuing the company.
Explaining Microsoft Corporation (NASDAQ:MSFT)’s Corporate Moat
According to an article on Bloomberg, “Last year, Microsoft’s business software division generated $24 billion, about one-third of Microsoft’s $73.7 billion revenue,” and was also its most profitable division with 15.7 billion, while the Windows division had $18.3 billion in revenues, and 11.5 billion in profits. (source)
I recently spoke to the owner of a small software start-up in England, who assured me that it would be a long, long time before large corporations stopped using Microsoft Office. I assumed that meant he used Office as well.
“No, we use Google Inc (NASDAQ:GOOG) Docs,” he explained:
… which are great and vastly cheaper. The reason that large corporations currently use, and will continue to use Office and Windows is because there are liability and paper trail issues that Microsoft Corporation (NASDAQ:MSFT) takes care of, so if they somehow lose massive data and get sued, they have protection. As a small corporation we don’t need to do this as much, we don’t have the same scale.
So while small businesses and consumers are veering away from Office, if my CEO friend is right, Microsoft still has a moat encircling its most profitable clients.
The Weakening Consumer Moat
Shares of PC makers sank last week, after a report came out documenting rapidly declining PC sales. Hewlett-Packard Company (NYSE:HPQ), one of Microsoft Corporation (NASDAQ:MSFT)’s biggest customers and the world’s leading PC maker, sank more than 6% on the news, and Microsoft also fell. Windows and Office have been Microsoft’s two huge cash cows, with moats that for nearly 20 years were not only never breached, but also grew in strength.
However, with continued innovation, new disruptive technologies have arisen, and Microsoft’s moats have begun to dry up in recent years. As mobile devices enjoy rising computing power and increased download speeds, many people no longer need traditional Windows-based PC’s.
Windows used to have 95% market share. That’s no longer true today; according to AppleInsider, “Counting tablets, Apple Inc. (NASDAQ:AAPL)’s share of worldwide PC shipments surpassed 20 percent for the first time ever during the last quarter of 2012.”
If someone decides a tablet is all they need, and it meets their computing needs, it might as well be a PC, and it ought to count like one. In addition to the iPad, Google’s Chromebooks are picking up steam with consumers, attacking Microsoft’s PC dominance on a whole other front.
Both Google Inc (NASDAQ:GOOG) and Apple Inc. (NASDAQ:AAPL) have captured buyers’ hearts and imaginations. The sad thing for Microsoft Corporation (NASDAQ:MSFT) shareholders is that Bill Gates talked about the future of tablet computing years and years ago, but Microsoft’s internal bureaucracy prevented the company from bring a tablet to market.