Microsoft Versus Apple
Things seem to be working out for Microsoft at the moment that could make the company outstrip Apple in consumer world market share for mobile devices and in market value. Just take a look at the following:
1. The company has many marketable securities/assets and net cash in excess of $70 billion that could be used to gain traction in any market direction the board may choose. Though there may be many challenges on the way, none would be insurmountable with the current strength of Microsoft.
2. Microsoft’s Azure and Office offerings are gradually yielding great revenues in excess of $1 billion per year and still counting. That achievement has made Microsoft the second largest global software provider in the cloud space.
3. The near death of BlackBerry (BBY) and the recent acquisition of Nokia’s handset operations implies that Microsoft has now become the third leading smartphone software provider after Apple and Google (GOOG) in that order.
4. Just a short moment ago not many people wanted to buy Microsoft’s Surface Tablet because Apple’s iPad specs were considered more superior. That perception has changed with the two new tablets (Surface 2 and Surface Pro 2) rolled out to meet the needs of every user before dust could settle on the previous unloved version. The general feeling is that the new tablets are a lot better for the money. In addition, the new tablets fit all categories of users. While Surface 2 is considered as an entry level tablet and it goes for $450 a unit, Surface Pro 2 cost as much as $1800 a unit. Also, the high end Surface Pro 2 now run up to 10 hours and it comes with good gaming features which are comparable to Apple’s MacBook Air.
5. Compared with Apple, Microsoft is great on ecosystem and that is another strong reason the company will certainly gain traction in the mobile devices market anytime soon. Many people would opt for devices running on Microsoft software because about 90% of all desktop computers presently run on MS Windows. So, we should expect that many people would like to purchase Microsoft mobile devices if only to sync their devices together.
The Bottom Line and Conclusion:
It is obvious that Microsoft would opt to buy Nokia because it is part of their aggressive tactics to gain traction in the devices space – tablets and smartphones – as soon as possible. I’m sure the brainy people at Microsoft aren’t expecting a smooth ride to the top and they don’t have to worry because they have the means to buy market share as well as any innovation that might be needed to push through. That implies that they won’t mind even if they incur some losses in their bid to capture the lion share of the smartphone and other devices market from any other competitor. Right now, about $21 billion of Microsoft’s $27 billion net revenue accrues to the company from commercial customers. As it is trying to become a customer-driven enterprise with offerings in the devices and services segment, Microsoft is targeting revenue in excess of $32 billion from this venture.
The company is bound to be highly successful and its future value should be greatly enhanced if it achieves all its targets and I don’t have any doubt about the ability of the company to achieve its goals looking at its comparative advantage over its competitors. In the last three years, Microsoft’s free cash flow margin was an average of about 35.5% which is a lot more than the 5% for which analysts regard a company to be a cash cow. I consider Microsoft stock to be a great economic moat for investors with conservative portfolios and therefore recommend the stock to value investors even at the current price levels.