Hedge fund ValueAct is reportedly buying more shares of Microsoft Corporation (NASDAQ:MSFT). In April, the firm bought a $1.9 billion stake, and might be using the tech giant’s recent sell off as an opportunity to buy more.
Make no mistake, Microsoft Corporation (NASDAQ:MSFT) is facing its biggest challenge in decades: the decline of Windows. Still, if Microsoft shows a willingness to listen to ValueAct, the company could have a vibrant future.
ValueAct’s bullish thesis
After ValueAct made its stake public, I wondered if investors should follow the firm into the Redmond tech giant. Had anyone done so, they’d be up on their investment, but just barely (about 2.5%).
Although PC sales have been declining for months, Microsoft Corporation (NASDAQ:MSFT)’s stock had remained unscathed. That is, until last week — shares dropped 11% following a terrible quarter. Microsoft’s management admitted that the demand for traditional PCs was declining, while its tablet gambit, Windows RT, has been a total failure.
But ValueAct doesn’t care. In April, the firm’s CEO said that the PC platform as a whole will be irrelevant in three to five years, replaced largely by cloud computing. ValueAct believes Microsoft is poised to dominate the cloud.
Specifically, Microsoft Corporation (NASDAQ:MSFT)’s Azure could become the dominant cloud computing platform. Azure allows other software makers to run their cloud applications on Microsoft’s servers.
Steve Ballmer has a different vision
But Steve Ballmer, Microsoft’s CEO, might not be willing to give up Microsoft Corporation (NASDAQ:MSFT)’s PC business. His recent reorganization of the company aims to, in his words, orient the company around “devices and services.” As I wrote previously, this seems similar to Apple Inc. (NASDAQ:AAPL)’s business model (integrated devices, services, and software).
According to Reuters, ValueAct would like to see Microsoft move away from integrated devices, probably shifting the focus of the company solely to cloud computing.
That would make more sense. Microsoft Corporation (NASDAQ:MSFT) appears to be completely outgunned by both Apple Inc. (NASDAQ:AAPL) and Google Inc (NASDAQ:GOOG) when it comes to mobile computing. While the Windows platform could persist on traditional PCs for years, further attempts by Microsoft to break into mobile computing would amount to throwing good money after bad.
The company just took a $900 million writedown on its Surface RT, while the Windows Phone platform remains far behind iOS and Android in terms of marketshare.
There’s competition in the cloud game
Of course, shifting from Windows to cloud computing is no guaranteed success. For over a decade, Microsoft Corporation (NASDAQ:MSFT) had a virtual operating system monopoly; Windows controlled almost the entire market, with Mac OS and Linux powering a small minority of machines.
But Azure isn’t the only public cloud solution. There’s Amazon.com, Inc. (NASDAQ:AMZN) Web Services, and Google’s Compute Engine. Both are formidable challengers.
Unfortunately, it’s difficult to compare the cloud solutions from a financial standpoint. The companies in question don’t break them out in their earnings reports, leaving second-hand estimates the best methods investors have to evaluate the situation.
