However, this is not the whole story for Microsoft, and current stockholders as well as potential buyers should not be too quick to discount the company as a thing of the past.
New and Growing Businesses
Despite declining sales in its PCs and Windows software, Microsoft has still managed to pull off a net increase in profits from its many businesses and product lines. It has been working hard to expand and diversify its holdings and that work has started to pay off.
They now have dozens of businesses with revenues at or above the $1 billion mark. These businesses include Xbox, Azure, Office, United Communications and many others. They are also doing remarkably well in foreign markets. For example, Windows phones are the second most popular smartphones in the Latin American market.
Overly Pessimistic Speculation
When all of this is taken into consideration, it becomes apparent that Microsoft is no longer wholly dependent on its PC and Windows sales. Therefore, declining profits in these areas should not be interpreted as a nail in the company’s coffin. In fact, Microsoft’s stock has grown by 47% in just the past year alone.
Furthermore, we should be careful not to read too much into this decline in PC sales. While it is true that it is definitely a shrinking business, PCs will remain the primary device for technology users for the foreseeable future. Many analysts predict an eventual stabilization of PC sales that, while being lower than they have been in the past, will still be an important source of profit for the company.
Big Plans in the Smartphone Market
Microsoft has recently purchased Nokia’s (NYSE:NOK) struggling handset division for a cool $7.2 billion in order to develop an exclusive Windows smartphone product line similar to Google’s earlier partnership with Motorola (NYSE:MSI). Unlike the Google-Motorola partnership, however, Microsoft has purchased the division granting them more benefits than Google received in its partnership deal. The company will now have access to about 8,500 Nokia patents including its patent licensing contracts with major companies like IBM (NYSE:IBM), LG (NYSE:LG), Qualcomm (NASDAQ:QCOM) and Apple.
Even before this major purchase, sales of Windows phones have been rising in the U.S. as well as markets around the world. It plans to develop a fully integrated Windows 8 operating system which will allow users to fully sync their devices and streamline their technology experience will likely prove to be a game changer in the market as neither Google’s Android OS nor Apple’s iOS can make the same promises. This integration means that a user can access any information or application stored on one device from any other device that also uses the Windows 8 software. This feature will appeal to both businesses and private consumers.
The Balance of Risk and Reward with the Nokia Deal
The purchase of Nokia was definitely a risky move. After being pushed out of the smartphone market by not just one but two emerging giants in the industry, most businesses would have taken the hint and moved on to other markets.
By purchasing Nokia’s handset division, Microsoft has made it known that it is not ready to give up just yet. This is definitely a risky move but perhaps one that an already well-established business like Microsoft can afford to make.
Thus while estimates of potential growth in profits from Windows phones differ — with Microsoft being more optimistic than outside analysts — most agree that with this Nokia deal, it will become a more significant player in the smartphone market. In this case, the reward will more than likely compensate for the risks it took in making this deal.
Microsoft has recently become an undervalued stock because many overlook the many innovative businesses it has been developing and think it is now just a behemoth of the past that will eventually die. But it has a number of growing businesses as discussed above and is actively updating itself as well as looking for new opportunities to accommodate the new and changing markets around the world. Buy.