Microsoft Corporation (MSFT): This Tech Giant Is Still Building a Competitive Ecosystem

Microsoft Corporation (NASDAQ:MSFT) Microsoft Corporation (NASDAQ:MSFT) just cut prices on the Surface and wrote down nearly $1 billion worth of the tablet’s inventory. Is this an admission that the Surface is a flop, or is it just this tech giant’s way of gearing up for a long-term fight?


There’s little question that Microsoft Corporation (NASDAQ:MSFT) has been late to the mobile party. It tried to break into the group with a mobile operating system, but it didn’t take off. As it retooled, however, it took a close look at competitor Apple Inc. (NASDAQ:AAPL) and decided it was best to start looking more like a winner.

One of Apple Inc. (NASDAQ:AAPL)’s big strengths is that it creates easy to use interfaces for its iPhone, iPad, and iPod products. Moreover, it has something of an ecosystem in which customers can comfortably live. With simple to use products that work out of the box, Apple’s success over the last decade has been nothing short of extraordinary.

That “easy ecosystem” model has allowed Apple Inc. (NASDAQ:AAPL) to grow its top line from around $6 billion a decade ago to about $156 billion in 2012. Earnings, meanwhile, have gone from a dime a share to over $44.00 a share. That said, it has pretty much saturated a mature market. That means market share is key and it is battling with fierce competitors like Samsung, Google Inc (NASDAQ:GOOG), and increasingly Microsoft Corporation (NASDAQ:MSFT).

Investors have sent the shares down some 40% from their highs. The stock yields around 2.8% and has a price to earnings ratio of about 11, or so. The company faces challenges in finding new customers or enticing existing customers to buy more, but its industry leading position and still massive earnings should afford it plenty of time to solve these issues.

The takeaway

The takeaway for Microsoft Corporation (NASDAQ:MSFT) was clearly that its products were too hard to use and didn’t play well together. So, it has created a uniform appearance across its products with the introduction of Windows 8 and Windows Mobile. Now, customers can buy a phone, computer, and a tablet and easily switch between them.

That’s a big thing, since, according to CFO Amy Hood, the company has “over 1.5 billion Windows users around the world…” Although every one of those customers may not like Windows, there’s clearly enough users to create a real business if Microsoft Corporation (NASDAQ:MSFT) can get them to buy into the ecosystem. It’s just going to take time and commitment.

Like Apple, Microsoft makes plenty of money. It had $73 billion in revenue in 2012, with earnings of about $2.00 a share. In the just ended 2013 fiscal year, the company’s earnings jumped to $2.58 a share. Granted Microsoft Corporation (NASDAQ:MSFT)’s top line is about half of Apple’s and its bottom line isn’t nearly as impressive (it has over eight times as many shares), the Window’s giant has plenty of financial firepower to push its ecosystem approach. And with a mid-teens PE, it appears reasonably priced.