I’m not a professional trader and I would never consider my financial advice something to base one’s investments on; be warned that what I am about to say is my own opinion and I expect anyone looking to invest in the stock market consult a professional financial advisor or stock broker before making any decisions.
If I had the money and the balls to do this, I’d short sell Microsoft stock like it was going out of style. The next eight months or so will tell me if I am right but I have a feeling that MSFT stock will be an ‘under performing’ security with little hope for a rebound. Why, you ask? Because of of Apple’s OS X and Mark Shuttleworth’s community project, Ubuntu.
With Microsoft approaching its 52 week high, a report of strong revenue growth, and brisk sales of Windows Vista, you’d think that 30.12 - where it closed on April 27 - is just the beginning of a wonderful year for the software giant. Using Google Finance, you can see that Microsoft is up just over 3% today and 10.5% from a year ago today. But all is not well in Redmond these days but it takes a careful look at the industry to understand the threats to MS and its long-term future (and profit potential). Looking at the charts some more helps explain things.
Though the stock is up over 10% from a year ago, it is flat year-to-date. If you bought three months ago, you’d be down 1.5%. Compared to the Dow Jones Industrial Average, it is lagging behind; the Dow is up 5.28% so far this year and the S&P 500 is also up over 5%. Rivals like Google are also ahead; they are up 4% but Yahoo, Oracle, and Apple are posting double digit gains this year; they are up 11, 11.4, and nearly 18%, respectively. The shocker, for me anyway, is that Novell is up by 18.23%! All these number don’t mean much if you don’t look at the fundamentals and, again, I’m no expert but here’s my take on them.
Windows Vista sales are up - that’s the good news. Profits are also up - more good news! But looking closely you have to question how they got to those figures. See, Microsoft recently made a change in how they calculate the sales figures of its flagship operating system. Instead of booking the cost over a three year period (or at least up to 25% of it according to today’s WSJ), they will realize the full income in the quarter in which the copy of Vista was sold. And as the WSJ points out, that amounts (no pun intended) into a quicker realization of revenue. Plus, PC sales across the country seem to have slowed in the past few months so one has to wonder what is really going on. What happens next year when you can compare it to this year’s sales? Also, has anyone compared how XP’s sales did compared to overall PC sales in October of 2001 and how it correlates to Vista sales now? I haven’t but I am willing to bet that XP did better. But the figures don’t justify why I would short sell the stock.
If you look at Microsoft’s long term opportunities, there aren’t much. They are already in offices, home offices, living rooms, game centers, web sites - many social, portable music/video players, cell phones, and even cars and ATMs. They are everywhere and their growth is limited. They can only expect their market share to go down and that’s exactly where its heading. In the past few years, MS has seen its dominance wane and its now in a panic.
First, it was Firefox. The upstart rekindled the web browser wars and now it boasts 12 to 15% of the market depending on what study you read. I think I remember reading once that Firefox usage in the EU is an astounding 25%! The features of Mozilla - like extensions - enhance the features of the app in ways that Microsoft cant. Users are free to customize their browser the way they want to and its payed off in users. Plus, there is this idea that Firefox is faster, more secure, adheres to more web standards, and can be used on more than OS. And that, brings me to my next point.
Linux was always talked about as the operating system that was going to bring Microsoft down. It was fast, secure, open-source, free, hardware independent, and based off of one of the most tested OSs in the world - UNIX which ran the Internet all the way back to the DARPA days. But it never gained a lot of traction because it was complicated to standardize, hard to support, and didn’t come with a large suite of applications to run. Fast forward 15 years and now you see some exciting builds that are gaining press time more and more.
Ubuntu is one of the most talked about Linux distributions and if you look into it, you can see why. It has organization, support, and a large list of user supported applications. It combines the best of the FOSS and commercial words - free software that can be customized with technical and application support to boot! I’ve used Ubuntu before and I’ve found it to be a fantastic OS. With OpenOffice and Firefox installed by default in every copy, one can have a fully functional OS for work and pleasure without dropping an extra penny. Plus, it works on older hardware so there is no need to buy a new computer. It almost never crashes becuase of the way Linux/Unix is designed and very robust; it can be a server or a desktop computer all for free.
The other operating system that is slowly gaining on MS is OS X. Helped by the popularity of the iPod, Apple has enjoyed a few years of compounding success. Computer sales are up this year and with the iPods that spells great profits for the Cupertino company. With its impeccable branding, design, coolness factor, and new accessories like AppleTV. Apple seems unstoppable. With a new version of OS X coming in October and the iPhone launching in a month or two, Apple is well poised to take even more away from Microsoft. It even has a successful media store which Microsoft has never been able to achieve.
The threats that Microsoft’s cash cow faces might still appear small on the one hand. But the other is taking it very seriously. While one side says sales of Vista are healthy, Microsoft has already discounted it and its Office products. In China, they bundle both of them for $3! Hackers elsewhere have figured out how to essentially deactivate the Windows Genuine Activation system and now its easy to pirate the OS that they thought wasn’t piratable. And the DRM isn’t helping.
The DRM is often blamed for poor hardware support - among other things. All this translates into slower adoption and higher support costs. With Dell, HP, and others already suffering from razor thin margins, they can’t support the complexities Vista brings. Dell even started offering Windows XP for the first time in months; no other computer maker has downgraded its OS selection like that. They are even considering installing Linux on some laptops.
So does the slower sales mean much? Well yes and no. They still earn a ton of money and they’ve got reserves. But Microsoft faces a battle on the web front, too. Google is the company that comes to mind when I think of Gmail, Calendar, Blogger, Documents, Photo, Groups, Maps, GoogleTalk, and all the lab apps. All are free and can let someone run a small business without the need for a $400 office suite. Plus, all the ad dollars that aren’t going to Microsoft will add up or, should I say, not add to the bottom line. Toss in Yahoo, MySpace, and all the other Web 2.0 companies eating away at their web presence and you’ve got some serious competition for Windows Live Services. Google purchasing DoubleClick doesn’t help in that regard and it hurts even more when you hear that MS might have offered MORE money for the company but they rebuked their offer in favor of Google’s.
But all these small things individually hardly do anything to hurt their monopoly. Added together, however, you’ve got a company with stagnant or negative growth. Worse, you’ve got a company that can no longer lock a user into proprietary technology. If Office 2007 needs Vista for example, but a user can use Google Docs & Spreadsheets, why do they need Vista in the first place? Its a little extreme, that example, but its one that drives the point. Why even buy MS Office if you can save yourself the money? Also, if you have XP and can do all your work on the web browser - a lightweight app in the first place - why upgrade? So it does hurt the wallet a bit. But worse than the cash flow, MS can no longer tie technology and applications together like they once did. And IE, Windows Media Player, X-Box, Zune, and Live Mail (or whatever Hotmail became) can’t flourish and perpetuate the cycle to upgrade. When someone else can define a standard which becomes popular and doesn’t include anything that ties them into your products, you become less relevant.
So Microsoft faces slow growth over the next few months. I’d even say it could be two years or so before we see them recover. Of course, I still think they will be a successful company - they aren’t going anywhere. They will learn from this process and bounce back. That’s why I say short sell the stock; I think it will go down before it goes up. If I were abandoning ship, I’d say SELL SELL SELL! But I’m not. And I’m not looking at the pure price per share thing either… I just think that all the sales problems and competition will deal a large enough blow to their market capitalization that makes me think they will be ripe for some SS action.
