) has been pouring money into its online services division for the
past few years. Despite the investment, the division continues to
post losses. However, this may be set to change. According to
Dave O'Hara, Chief Financial Officer for Microsoft's Applications
and Services Group, the online service is all set to break even in
the coming quarter, or so he told investors at the recently
concluded UBS conference.
The primary reason for this turnaround is the increasing share
of Bing in the search engine market. Over the past few years,
Microsoft has deeply integrated the capabilities of Bing into a
host of products such as Xbox, Windows Phone, Office and Windows 8.
As a result, Bing's share has increased from 13% in January 2011 to
over 18% in November this year. In this article, we will look at
the factors that aided the adoption of Bing and how this will help
the online division to turnaround.
See our complete analysis of Microsoft here
Promoting Bing Through Product Integration
In July this year, Microsoft unveiled its one product strategy.
However, the origins of this strategy can be traced to the
integrations of Bing's capabilities with a host of products. During
the year, Microsoft not only introduced the enhanced search
capabilities of Bing for its Windows 8, but also integrated Bing
with its Office 365. As a result of this integration, Bing's market
share in the U.S. has increased by 1.6 percentage points in 2013 to
18.1%. We expect this trend to continue as Microsoft plans to
integrate more of its products with Bing.
Improving Performance Metrics To Bolster Division
The Online Services Division has negatively impacted Microsoft's
overall profitability as it continues to post operating losses.
However, due to rise in Bing's penetration, the division's revenues
have increased by 15% year over year in the first nine months of
2013, boosted by 47% growth in online ad revenues. Search ad
revenues depend on the number of searches performed on Bing and the
revenue per search (RPS). Currently, we project RPS to decline from
$16 in 2012 to $11 by the end of our forecast period.
However, the data from comScore indicates that the explicit
search queries for Microsoft has been flat at 3.28 billion per
month in 2013 so far. Therefore, we can conclude that the revenue
per search for the company has increased, which has led to an
improvement in the pricing of search key word (also known as Cost
per Click). If this trend were to continue in the coming quarters
and RPS were to stabilize at $15, our stock price estimate can
increase by 5%.
Furthermore, any improvement in RPS can help the company to post
operational profit as Bing's business has high operating leverage,
and any further investment in Bing will result in incremental
revenues and profits.
$42 price estimate for Microsoft
, which is approximately 25% above the current market price.
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