However, the poor performance of Windows is beginning to trickle over to the “Business Division,” which primarily houses Microsoft Office. Since customers usually buy a new Microsoft Office license when they buy a new PC, the PC sales slump is hurting Microsoft in two ways.
On top of this problem, many people are finding that the free Google Drive productivity tools are “good enough” for their needs. Microsoft Corporation (NASDAQ:MSFT) is trying to drive higher usage of Office among students through a recent promotion giving students six months of free access to Office 365 (the company’s new cloud-based version of Office). After that, students can get four years of access for just $80.
Office remains a must have for businesses, and many consumers will continue to use Office, as well. However, the rise of competition from Google and other free productivity suites is forcing Microsoft to offer deeper discounts than was previously common.
Foolish bottom line
If Windows and Office have both peaked, as I believe, Microsoft stock isn’t likely to make any progress in the next few years. The two divisions are still cash cows, and combined for more than $27 billion of operating income last year (excluding unallocated corporate expenses ). However, if earnings from those businesses gradually decline due to poor PC sales trends and a continuing shift to free productivity tools, Microsoft will be unable to make this up through growth elsewhere.
Microsoft Corporation (NASDAQ:MSFT) has touted its progress in cloud services and in the “living room” to investors. On Tuesday, the company revealed the next-generation Xbox One, which offers a number of improvements over the Xbox 360. Still, it is unlikely to be the game changer that investors hope for. The Xbox business is too small to drive company-wide earnings growth in light of the likely continuation of weakness in Windows and Office sales. As a result, investors might be wise to sell Microsoft stock while it sits near multi-year highs.
The article Microsoft Stock May Be Running Out of Gas originally appeared on Fool.com and is written by Adam Levine-Weinberg.
Fool contributor Adam Levine-Weinberg owns shares of Apple. The Motley Fool recommends Apple and Google. The Motley Fool owns shares of Apple, Google, and Microsoft.
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