Microsoft Corporation (MSFT): 2013 Is Do or Die

Microsoft Corporation (MSFT)The downgrades for Microsoft Corporation (NASDAQ:MSFT) keep on accumulating. Normally this would be seen as bad news, but given the company’s performance over the past 10+ years, it is par for the course for investors. Microsoft Corporation (NASDAQ:MSFT) has underperformed the S&P500 in 4 of the past 5 years, showing a positive return in only 2 of those years. This performance is a result of the company’s profits being over-leveraged to PCs, questionable financial guidance practices relative to their peers, questions over their strategic direction, uses of cash, and their long-term profit profile. Microsoft has a $9 billion/year R&D budget (greater than Apple Inc. (NASDAQ:AAPL) and Google Inc (NASDAQ:GOOG) combined) and the flexibility of a $60-$70 billion cash position although neither has been properly utilized, resulting in the company continually being “late to the party” and ” boring and middle aged.” These are not my words, but those of former Google Inc (NASDAQ:GOOG) CEO Eric Shmidt, who also said that Microsoft Corporation (NASDAQ:MSFT) is no longer part of the ‘gang of four high-tech companies.’ According to Shmidt, the four members include Google Inc (NASDAQ:GOOG),, Inc. (NASDAQ:AMZN), Apple Inc. (NASDAQ:AAPL) and Facebook Inc (NASDAQ:FB). With the exception of acquiring Skype for $8.5 billion, Microsoft over the past decade has offered nothing to satisfy shareholders.

Conceivably due to the need to shore up profitability (despite an incremental $25 billion in revenue over the past 5 years) Microsoft has seen its operating margin erode -70 basis points and its gross margin erode -500 bps. The speed of product innovation (time to market) is atrocious as it took the company five years to ship a competitive smartphone OS to market.

Looking more closely at key numbers, Microsoft Corporation (NASDAQ:MSFT) has a PE of 8.7 times, which is near their 5 year low of 8. Will 2013 provide any relief to shareholders? Historically speaking the answer is an obvious “NO!” as previously stated the stock price is virtually the same today as it was in 2000. The following are key factors that Microsoft needs to address, in order to restore investor confidence and move forward in the future.

Will Microsoft focus on Office?

Office is by far Microsoft’s ‘bread and butter’ and so globally pervasive. Competition is limited as Google under Larry Page seems less interested in the productivity business. With the release of Office 2013, Microsoft will finally be able to extend the Office suite to mobile devices, as Office 2013 was designed with full touch and pen capabilities. Selling Office to iOS, Symbian and Android devices will unleash the potential for a large incremental revenue opportunity. Microsoft Corporation (NASDAQ:MSFT), finally got something right: tablets, iPads, iPhones and Android-powered smart devices are drastically outselling boring, outdated, lame computers and laptops. Microsoft will offer smart users the opportunity to purchase an Office 365 subscription to access, edit, and create Office documents on their devices. This is something that never existed before. But don’t get too excited and buy shares of the company just yet, as this is not likely to hit the market before 2014.

Shaking things up with management

From the leadership standpoint Microsoft today is very different and unrecognizable from just a few years ago. Several key managers have recently left Microsoft, most notably Steven Sinofsky, who was President of Windows Division from July 2009 to November 12, 2012. Sinofsky left Microsoft after disagreements with several executives, including CEO Steve Ballmer. No single executive has been named to lead Windows going forward and several executives are performing Sinofsky’s duties. Julie Larson-Green, is assuming Windows development, including hardware, while Chief Marketing Officer Tami Reller will take on the business and marketing side of the OS. This could in fact be a prelude to a larger divisional collaboration and improve profitability. Moving Windows Phone into the Windows division makes sense as the two products finally share the same base and much of the same coding. Microsoft should focus on Windows as a unified PC + tablet + phone experience for users and developers. A divisional reorganization could help Microsoft cut costs and increase product collaboration improving time to market and increasing the overall value of the Microsoft Corporation (NASDAQ:MSFT) brand in the eyes of customers and shareholders.

Should he stay or should he go?

2012 was an active year for CEOs coming and going within many technology companies. New CEO’s were brought in at IBM, VMware, HP, Yahoo! Inc. (NASDAQ:YHOO), Research In Motion Ltd (NASDAQ:BBRY) and several other high profile corporations. With Microsoft in the middle of refreshing virtually every major product in the 2012/2013 timeframe, Windows 8 finally opening up the tablet opportunity for Windows, and the Windows phone brought up to standard, 2013 could be the year that we hear of CEO Steve Ballmer’s succession plans.

Changing of the guard worked at other companies.

At other technology companies such as Yahoo!, the announcement of a new CEO resulted in significant appreciation to the share price. Marissa Mayer, a former Google executive has driven up Yahoo!’s stock prices to levels it has not seen since 2009.  Mayer has become the darling of Wall Street, and has revived a tech company that has been perceived as old, outdated, tired, and ugly.  Shares of Yahoo! Inc. (NASDAQ:YHOO) have been rising steadily since Mayer took over. Yahoo! Inc. (NASDAQ:YHOO) shares are up 55% since September 2012, and have outperformed the Nasdaq Composite Index, the S&P 500, and obviously Microsoft.  Perhaps it is time for Microsoft Corporation (NASDAQ:MSFT) shareholders to demand a changing of the guard to hopefully match Yahoo’s fate.