Microsoft (MSFT, Financial) is currently trading near 52-week highs. The stock has gained more than 7% this year so far, despite the recent sell-off in tech stocks. The company reported strong third-quarter results recently, and looks set to deliver growth in the long term. Let's take a closer look at Microsoft's prospects and see why it is a good long-term investment.
Why the future looks better
Microsoft was not the only company that had soft results in the PC market last year, as PC sales declined nearly 10% in 2013. However, the recent news from IDC should give some confidence as PC shipments are expected to drop only 6% this year to approximately 296 million. Hence, Microsoft can expect better sales numbers for its Windows software this time than it had last year.
In addition, Microsoft has officially discontinued providing support for Windows XP, which should certainly increase sales for its Windows 8 and Windows 8.1 devices. Also according to Forbes, “Sales of Windows 8 haven’t been very bad and the operating system lags sales of Windows 7 just marginally”.
Microsoft recently stated that Windows 8 has reached the 200 million licenses landmark. The 200 million Windows 8 licenses compares well against a slower PC market, so it works out to 63 Windows 8 licenses per hundred PCs sold. This makes Windows 8 sales 34% better than Windows Vista, and about 15% higher than Windows XP. It also puts Windows 8 only about 7% behind Windows 7. Therefore, a slower decline in sales of PCs this year and the withdrawal of its support for Windows XP should lead to increase in sales for its Windows 8 and 8.1 versions.
Besides, Microsoft has received tremendous response from the market for its Surface 2 tablet, which is expected to grow at a healthy pace going forward with the growing popularity of smartphones and tablets. Surface had produced some good revenue for the tech giant, as its revenue doubled in the last quarter.
Gaming success
Microsoft, on the other hand, is very excited about the successful launch of Xbox One in 13 markets with nearly 3.9 million unit sales in just over five weeks, indicating significant progress in the consumer space. Also, Xbox One was the leading console in the U.S for the month of December, which was its first full month that helped the company capture nearly 46% share of the U.S console market in December last year.
Microsoft is encouraged by an enthusiastic response from its loyal customers, and is working to increase sales of the Xbox One. Besides, the company made a smart move by launching the exclusive gaming title, Titanfall, for its gaming console. Titanfall was the top-selling game for Microsoft in March 2014, with a solid attach rate to the Xbox One. After one month of sales, it is currently the second-highest selling game for the Xbox One.
Apart from this, Microsoft has bundled this game with the Xbox One and sold it at the same price, thereby increasing adoption of the console. As the console cycle matures, Microsoft should continue gaining ground in the gaming segment.
Enterprise still strong
Microsoft is also witnessing strong traction in its core business segment. It has observed growth in the business PC market, driven by an improving macro environment, better availability of innovative new hardware, and a refresh cycle ahead of Windows XP's end of support.
Moreover, its multiple platforms of Windows software for business customers is creating tremendous revenue opportunities for the company. Windows Pro revenue grew 12% in the last quarter and outpaced the underlying business PC market, driven by faster growth in both enterprises and developed markets, where Pro attach rates are higher. Bookings in the commercial business were up 12%, and renewal rates remained in line across Microsoft’s product portfolio.
Hybrid infrastructure and management offerings are top priority with Windows Server, Azure, and Systems Center at the center of the hybrid cloud strategy. Together, they enable portability and scalability of workloads. Customers get high scale virtualization, built-in software defined networking, and hybrid business continuity that enables their modern data centers by using this product suite.
Conclusion
Microsoft is determined and is making some strategic moves to alleviate falling sales of PCs in the consumer market. Also, the company’s diversified business and stabilization of the PC market should help it deliver a better performance going forward. As such, Microsoft looks primed for further gains.
