We all know the story. Microsoft (MSFT) is an example of everything that is bad about a big, bloated tech company. They have lost their way, they service the dying PC market, they missed out on search and mobile, their management is an old boy’s club lacking imagination, yada yada yada. To listen to some of the critics you would think that this is a company about to collapse. When you step back, of course, it isn’t. MSFT is a nearly $300 Billion company, with annual sales over $76 Billion, sales which incidentally, grew at an 18% rate over the last 12 months. Despite that, there is talk of another management shake-up and a possible shareholders’ revolt on market geek gossip sites such as Stockr. It seems the company has few friends, but the stock has done well recently, approaching the 10 year high of $37.50, achieved during the heady days of November 2007.
Now I have to admit that that 10 year chart hardly screams “BUY!” at you. It has the appearance of a sick man’s heart monitor, but does show a pattern of higher lows and higher highs over the last three years. Longer term, the stock has never recovered from the tech wreck in 2000/2001; a period of lethargy that has been magnified by the huge success of companies like Google (GOOG) and Apple (AAPL) during the same time. The contrarian in me, however, believes that this very lackluster performance could be the key to the stock outperforming in the coming months.
MSFT will report earnings later today (Thursday) and expectations are for a slight increase in revenues, despite continued weak PC sales. The focus of most analysts, however, is likely to be on anything that is said, or any clues that are given, regarding the re-organization at the company that was announced last week. The company will likely confirm the shift in focus towards services and devices, a move that market watchers have been calling for. The release and subsequent earnings call is likely to produce significant short term volatility, but regardless of what they say, I believe that, finally MSFT may be about to go through a period of outperforming the market.
MSFT is currently in the exact opposite position to where Apple was just over a year ago. At that time, I wrote an article suggesting that the meteoric rise in the stock may be over at around the $700 level; not because the company had stopped being great, but because it was by then almost impossible to beat the market’s expectations. There was also a sense that the iPhone 5 was receiving a tepid reception from the previously gushing critics, suggesting that the company could no longer do no wrong in the eyes of the trendy.
Microsoft could not be further from that spot. Right now, the market expects little from them and is busy clamoring for wholesale changes, and hinting at shareholder activism. The company meanwhile has been steadily improving market share in the search field with Bing, and having some success in the tablet and phone markets.
There has been a change of tone amongst reviewers here too. Where once anything Microsoft was considered beneath the tech cognoscenti, the perception of Windows Phone, Surface and even Bing, has subtly shifted to where favorable reviews can be found. Google still dwarfs Bing in the search market, with 66.7% versus 17.4% in May, but Bing has increased share gradually, improving from 15.4% a year previously.
The worrying thing for Microsoft is that this improvement has come from smaller rivals Yahoo (YHOO), AOL (AOL) and ASK, rather than directly from Google which has held its share steady, but Bing is forming a solid base from which to challenge the market leader. One of the advantages of sales around $76 Billion is that it does enable a company to stick with something when there are signs of future success.
Steering Microsoft back to growth is going to be a slow process somewhat akin to turning around an aircraft carrier, but IBM has shown that it is possible for a tech giant to emerge from a period of consolidation (some might say stagnation) and grow again. I believe this process has started, and should major personnel changes be made, incoming management could well be the beneficiaries. For investors, with expectations so low, it would seem that any hint of growth could see the stock pop significantly, and you get a decent dividend yield of over 2.5% while you wait. Regardless of the numbers released today, and what is said on the subsequent call, I believe that MSFT has limited downside, due to its base of core business, but significant upside, based on the likelihood of exceeding expectations. It is hard not to exceed expectations when it seems nobody has any and when a company reaches that point while still growing, it’s only a matter of time before the market starts to focus on the growth and the stock pops.