Back in Q1 2012, only 18.7 million tablets were sold, which means that there was 117% growth in the market as 40.6 million units were sold in this year’s first quarter. This is down from the 146% year over year growth last year, but shows us that consumers are taking well to the tablet market.
We have yet to see what kind of consumer purchasing cycle tablets will have (such as 2 years for smartphones or 8 years for PC’s), but if tablets can get a 3-4 year cycle in (with hardcore techies buying it every year) then Microsoft has another high-growth market to muscle its way into.
Both of these recent findings have helped push Microsoft’s stock up even more after its latest earnings report, but some major headwinds lay ahead.
The “collapsing” PC market
PC’s are done for; PC’s are obsolete; PC’s are no good; PC’s are last years technology. All of these and more are the slogans of the PC pessimists who think the PC market is over as consumers move to tablets. This is supported by an IDC report saying that PC shipments for Q1 2013 fell 14% year over year versus Q1 2012. Even Apple saw its Mac shipments fall 7.5% (OMG, Apple?!?).
This is considered the harbinger of death for Microsoft, as over half of both its revenue and profit come from its Windows and Office division. But if consumers aren’t buying new computers, corporations are holding off on upgrades, and governments are cash strapped and can’t upgrade as well, then Microsoft can’t grow because its biggest segments (with operating margins around 70%) are holding the rest of it back.
Final thoughts
The tablet and cloud industry are going to be important growth drivers for Microsoft in the years ahead, and both could help reduce Microsoft’s dependence on Windows/Office. The PC market isn’t going to disappear, especially not in a day, so I don’t expect to see Microsoft become obsolete as some ultra-bears contended.
On the other hand, Microsoft Corporation (NASDAQ:MSFT) is trading at a PE (TTM) of 17.2 and is expected to grow around 10% for the next few years, so I would say it is fairly valued. I don’t expect Microsoft’s rally to go to much higher, but $35 a share seems reasonable. The biggest worry for shareholders as to what could push Microsoft back in the $25-$32 range, is if IDC comes out with more double digit drops in PC sales over the next few quarters.
If the PC market gets better or at least sees smaller declines, Microsoft will trend higher. If not, and PC sales continue to slum by double digits in 2013, Microsoft Corporation (NASDAQ:MSFT) will go back to being range bound and could fall by 20-30% to go back into the high $20’s.
Callum Turcan has no position in any stocks mentioned. The Motley Fool recommends Amazon.com, Apple, and Google. The Motley Fool owns shares of Amazon.com, Apple, Google, and Microsoft.
