During the past 18 months,
Microsoft's (Nasdaq:
MSFT
)
army of software engineers worked feverishly to prepare for the
tablet revolution. The company's newest version of Windows was
aimed at taking back lostmarket share from the likes of
Apple (Nasdaq:
AAPL
)
and
Google (Nasdaq:
GOOG
)
. Yet as I
noted in this article
, the launch for Windows 8 has been underwhelming. Nearly three
months later, this view still holds.
Still, Microsoft has many other core strengths outside of
operating software. Management should shift focus and ensure that
each of these divisions has the right growth drivers to take market
share. With more than $60 billion in netcash just sitting in the
bank, it's foolhardy to stand back and do nothing.
Here's a look at three Microsoft niches and how the company can
strengthen them through acquisitions of young, fast-growing firms
that are gaining relevant traction. History has shown that the
fast-changing technology landscape often produces tomorrow's
top-performinginvestments . And these are the kind of opportunities
no investor should ignore.
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Server and tools
It's easy to overlook this division as it has little
exposure to the consumer end of the technology world. Yet
it's a $20 billion (in annual sales) division that is a key
player in the management of many corporate networks.
Microsoft has an especially strong presence in business
intelligence and structured databases (with its SQL server
platform).
But in recent years, the hottest growth areas have been
in a field known as "Big Data," which is the ability to
log, classify and analyze massive reams of data in
real-time. And the most dominant entrant in the field of
independent vendors is
Splunk (Nasdaq:
SPLK
)
, which closed on its first day of trading in April 2012 at
$35.50 a share and is now a few dollars cheaper. Microsoft
would likely have to pay north of $4.5 billion to acquire
Splunk, which seems pretty rich for a company on track for
just $260 million in sales in fiscal (January) 2014.
But using Splunk as a beach head for a move into the Big
Data niche would likelyyield major benefits for Microsoft
down the road as it goes head to head with
Oracle (Nasdaq:
ORCL
)
and others. Microsoft could also look to make a smaller
purchase in the field: Privately-held firms include Sumo
Logic and Loggly.
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Online services
If Microsoft wants to be seen as a serious challenger to
Apple and Google in the consumer space, then itwill have to
beef up this division, which is home to the Bing search
engine, the MSN portal, the Hotmail email service and the
company's SkyDrive data-storage service.
It's this last service could serve to be a Trojan Horse
for the company's other consumer initiatives. Hosting
personal data and media content in the cloud is a key goal
for Apple, and it should be for Microsoft as well. After
all, consumers tend to remain clients once they have all of
their important files on a particular platform.
To boost market share in the data-storage segment,
Microsoft may look to acquire
Carbonite (Nasdaq:
CARB
)
, which is growing at a 20% annual clip and is on pace to
exceed $100 million in sales this year. The company is
valued at about $265 million, and even assuming a 30%buyout
premium, this would still barely make a ripple in
Microsoft'sbalance sheet . Privately-held Dropbox, which
may look to pull off anIPO this year, is also a potential
target for Microsoft.
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Entertainment services
In the entertainment space, Microsoft's biggest
challenge is a simple one: Attract new customers to its
platform (which includes Skype, MSN, Bing, Hotmail and its
various gaming efforts), and figure out ways to keep these
customers' eyeballs glued to the company's properties.
Outside of video games, the company is lacking compelling
forms of entertainment and popular online services (such as
dating sites).
That's where
IAC/Interactive (Nasdaq:
IACI
)
comes in. The company operates a range of online dating
sites (such as Match.com), media and humor sties (such as
Vimeo.com and CollegeHumor.com) and has also invested
heavily in mobile apps, which is a big part of Microsoft's
revamped smartphone efforts.
IAC/Interactive brings more than just a $3
billionrevenue base: It also brings an army of tech-savvy
developers who have shown a willingness to make bold moves,
a personality trait Microsoft sorely lacks. Back out
IAC/Interactive's net $700 million in cash, and the company
is currently valued at less than $3 billion. Chairman Barry
Diller is now in his 70s and may be willing to take anoffer
from Microsoft -- for the right price.
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Risks to Consider:
It's never wise toload up onstocks simply because they
may become buyout fodder. Instead, think of it as just another
virtue among the manyinvestment merits you assess.
Action to Take -->
One year ago, investors were looking ahead to Microsoft's looming
Windows upgrade, andshares were moving above the $30 mark. A year
later, shares have lost momentum and are back in the $20s, exactly
where they stood five years ago. Apple and Google's share prices
are up 200%, and 50%, respectively, in the same period.
It's increasingly apparent that Microsoft will have to keep
stepping on the gas to get its share price moving again. Its
cash-rich balance sheet means that deal-making will most likely be
part of the strategy. The buyout targets I mentioned here are a
good starting point for further research as you refresh your
understanding of the technology landscape. While some of these
young companies will be buyout targets, others some will prove to
be winning investments on their own merit. The 2013 IPO calendar is
chock-a-block full of these high-growth tech companies,
which you can read about here
.
-- David Sterman
P.S. -- It's finally here... our Top 10 Stocks for 2013. Since
we first began publishing this annual report in 2003, our picks
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David Sterman does not personally hold positions in any
securities mentioned in this article. StreetAuthority LLC does not
hold positions in any securities mentioned in this article.