Everyone has an Achilles heel, even Microsoft Corporation (NASDAQ:MSFT) and Google Inc (NASDAQ:GOOG). These two tech giants hit a strong headwind recently, with Microsoft plummeting by over 11% in one day, while Google Inc (NASDAQ:GOOG) shaved a little off its market cap.
Microsoft Corporation (NASDAQ:MSFT) reported earnings that dismayed investors, as it took a $900 million writedown on its Surface tablets. The writedown came after Microsoft Corporation (NASDAQ:MSFT) cut the price on some of its tablets by as much as 30%.
Missed by a mile
Microsoft Corporation (NASDAQ:MSFT) reported earnings of $0.66 per share (excluding the write down) on $19.9 billion in revenue, missing estimates of $0.75 per share and $20.73 billion of revenue. If you factor in the write down then Microsoft earned $0.59 per share. Revenue was up 3% and operating income was down 11% to $6.2 billion.
The Windows unit saw sales of $4.4 billion, which missed expectations by $400 million as PC sales continued its free fall. This comes as the CFO stated that consumer PC sales fell by 20%.
On the plus side, Microsoft Corporation (NASDAQ:MSFT) saw 9% revenue growth (year over year) in its Servers and Tools business, with data and system centers posting 14% growth and SQL servers posting 16% growth. It’s Azure cloud offering added 25% more customers and in the conference call Microsoft said that Azure is now in over 50% of the Fortune 500 companies.
Where Microsoft Corporation (NASDAQ:MSFT) is doing well is on the business and enterprise side of things, while the consumer side remains a heavy drag. If you look at the Microsoft Business Division, total revenue was up 2% with business growth hitting 7% while consumer revenue fell by 27%. The one area that Microsoft is seeing growth is in the entertainment division.
Revenue in the Entertainment and Devices Division grew by 8% (year over year) with Xbox Live transaction revenue growing by 20%. While the Xbox side of Microsoft is only a small part of its overall profit, it offers some downside protection from the other consumer side of things.
The world’s most interesting bond
Microsoft’s stock hasn’t gone anywhere over the past decade, so I have dubbed it the world’s most interesting bond, paying out a 2.6% dividend with a payout ratio of 34.1%. Microsoft will continue to boost its payout ratio through good times and bad as its business side grows at a steady rate.
The consumer side is still a big drag on Microsoft and will be for at least 2 more years because there is little need to upgrade your PC while wages are still stagnant or falling. During the recession, wages in the US fell by 4% in real terms and by another 4% since it has ended. Consumers won’t upgrade their PC’s until they feel like they can afford it. Within 2 years Europe should at least see its unemployment rate (now at 12.2%) hold, and the US will start to see wage gains once again.
This will spur more consumer spending and PC sales will begin to rise again, boosting Microsoft’s revenue and profits once again. As of now, I would rate Microsoft a hold, with strong business growth being weighed down by a declining consumer side, with a nice 2.6% dividend to balance things out.
Intel Corporation (NASDAQ:INTC) is another casualty of the declining PC market. Intel Corporation (NASDAQ:INTC) forecasted third quarter sales of $13.5 billion (plus/minus $500 million), which was $200 million less than estimated. Intel Corporation (NASDAQ:INTC) posted an EPS of $0.39 ($2 billion), which missed estimates of $0.39 and was down 29% from $0.54 ($2.83 billion) a year ago. Sales fell 5.1% to $12.8 billion, missing estimates for $12.9 billion.