ValueAct’s Stake in Microsoft Corporation (MSFT) Could Be a Gamble

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Recently, the ValueAct hedge fund took a mighty big jump into the Microsoft Corporation (NASDAQ:MSFT)’s pool – to the tune of a nearly $2 billion position in the company. With ValueAct’s new position, however, some feel that the fund may have taken a fairly large gamble that may or may not pay off down the road.

The personal computer issue

Although Microsoft Corporation (NASDAQ:MSFT) was a hot stock in the 1990’s, over the past ten years or so its the stock has practically sat idle. Some of the reasons for this include the company’s overall stagnant growth, as well as some of the less-than-ideal acquisitions that the firm has made.

To make matters even worse, the recent dramatic decline in personal computer sales has actually been cause for many people to doubt that this once-prominent software mammoth will be able to see light at the end of the tunnel.

Microsoft CorporationWith such a large drop in PC sales, for example, the longer-term positive prospects for Microsoft Corporation (NASDAQ:MSFT)’s Windows operating systems could be in trouble. This would especially be the case if consumers continue to purchase more mobile devices such as tablets that are powered with Google Inc (NASDAQ:GOOG)’s Android or Apple Inc. (NASDAQ:AAPL)’s iOS operating systems. Interestingly enough, though, ValueAct isn’t concerned with the potential impact on Microsoft’s from slipping personal computer sales.

Cloud computing could pay off

Because software has been shifting more from local installations to cloud computing-based software as Internet speeds increase, there is less actual computing that occurs on PCs and, in turn, distant servers have been taking over this task.
ValueAct’s CEO appears to verify this. He backs up the fund’s decision to purchase its large share in Microsoft Corporation (NASDAQ:MSFT) by stating that over the next few years, the industry will talk much less about personal computer cycles and will replace that talk with discussion about how Microsoft has grown to be the biggest cloud computing entity worldwide.

This feeling is also the norm at Microsoft Corporation (NASDAQ:MSFT) itself – at least with company CEO Steve Balmer. He tends to see the time frame of this potential occurrence at closer to 10 years versus five or less, however.

One other area of particular liking to ValueAct is Microsoft’s Windows Azure service. This bit of tech wizardry lets customers create their own cloud-based apps and then host them on the servers at Microsoft Corporation (NASDAQ:MSFT). Given the positive attitude surrounding cloud-based technology, Azure is also likely to please many consumers who are seeking the same or similar capabilities.

Google is always standing by

Google Inc (NASDAQ:GOOG) is certainly not to be outdone. This company, not surprisingly, may very well be in a position to be the leader in the future of cloud-centric technology with offerings of its own such as the Chromebook and its Chrome OS operating system.

This cool yet radical operating system is inexpensive to use, and for good reason, as the Chromebook is really just a computer that includes a browser. In addition, those who use Chromebooks are literally not able to run any local software. With faster Internet speed, though, cloud-based computing can basically be considered an alternative to local software.

Of course, this keeps the user relying upon cloud-based services for virtually all computing requirements. Google Inc (NASDAQ:GOOG) isn’t worried though, as these needs can be met with the company’s existing cloud-based offerings. These include Google Docs, Google Hangouts, and of course Gmail – in addition to various others.

With the potential for  cloud computing to surpass more traditional computing, it is highly likely that Google Inc (NASDAQ:GOOG) is already very well positioned in this space. Although in terms of an investment in company shares, the  company’s stock is quite a bit more expensive in comparison to Microsoft Corporation (NASDAQ:MSFT)’s. This is likely what ultimately led ValueAct to lean towards Bill Gates’ baby instead.

Apple may be left behind

With all of the hoopla regarding Microsoft and Google Inc (NASDAQ:GOOG), what about Apple Inc. (NASDAQ:AAPL)? The likely scenario is that when it comes to cloud computing, this company could very well be left behind. Given that Apple has essentially built its reputation – and revenue – on selling top-quality and high-cost electronics, the company’s current business model could end up worthless.

This is due in large part to the fact that a user’s experience with Google Inc (NASDAQ:GOOG) Chrome, for example, will be primarily the same regardless of whether they are using a Mac, Chromebook, or a PC powered by Windows. Once consumers understand that they can have a similar – or even the same – basic experience on a $200 Chromebook as they can on a $1,200 Macbook Pro, their choice in hardware may very well shift. This won’t be good news for Apple Inc. (NASDAQ:AAPL).

In fact, when getting the same experience for one-fourth the price (or less), it likely won’t matter to some consumers how awesome their device is. Shifting hardware sales would move consumers to whichever company has the ability to provide the least expensive and most usable equipment that meets their needs.

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