From an advertising standpoint, Microsoft Corporation (NASDAQ:MSFT) has made quite a splash with its Surface tablet (check out its latest TV spot here), but a recent note from FBR Capital Markets analyst Craig Berger suggests that sales have been "disappointing" this quarter.
Originally reported by Adrian Kingsley-Hughes of ZDNet,
Berger shares with clients that demand for the Surface has
"underwhelmed expectations," which were quite low to begin with. In the
article, Kingley-Hughes discusses that "Microsoft was only expecting to
shift between 3-5 million Surface tablets this quarter in the first
place," which pale in comparison to Apple Inc. (NASDAQ:AAPL), which "sold three million iPads in the first weekend alone following the release of the iPad mini and the iPad 4."
While this note, if proven to be
correct, may certainly spell trouble for Microsoft's own tablet, it's
worth mentioning that the Windows 8 operating system -- at least in the
tablet arena -- is expected to perform quite well, according to the
latest research report from IDC (which we discuss in detail here).
In the report, Microsoft Windows's share of the worldwide tablet market
is expected to be 10.3% by 2016, up from the 2.9% it's predicted to
hold by the end of this year. In terms of actual growth, IDC forecasts
that Microsoft Windows will experience a CAGR of 69.2% over this
five-year timeframe, far above Apple iOS (20.9%) and Google Inc (NASDAQ:GOOG)'s Android (21.0%) operating system.
Thus, Microsoft's main issue looks to be
finding an adequate entry into the hardware space that consumers will
prefer over other Windows-bearing brands like Asus, Acer and Lenovo. At a
price point equal to that of Apple's iPad and above the iPad Mini, the
Surface may not be differentiating itself from the competition enough,
even if it has that handy-dandy cover keyboard.
The next logical question that investors
must ask is: what does Microsoft have up its sleeve? Well, looking at
rather insightful PCWorld piece,
"the company plans to launch three new devices in the next year," at
least according to Twitter user “MS Nerd," a "well-known source of
leaks."
While it's tempting to ignore these
suggestions, it's worth mentioning that this particular source has been
correct about Microsoft leaks before (though not always),
and accurately predicted: (1) that Windows 7.8 would be used to give
some features of Windows 8 to outdated hardware, (2) "the impending
demise of Zune hardware," and (3) most of the Windows Phone 7 specs.
Sometime in 2013, the rumor foresees
three new Surface coming from Microsoft, with the first being an
8.6-inch standard Surface (which is two inches smaller than the current
model), the second being a Windows 8 Pro-equipped Surface with an
11.6-inch screen, and the third being a 14.6-inch device called the
Surface Book. If these rumors are true -- and there's a possibility that
they'll end up being off the mark -- then it appears that Microsoft is
positioning itself to compete with the iPad Mini and the iPad by way of
separate devices, while offering something in the form of a hybrid
laptop-tablet with the 14.6-inch model.
If investors are looking to get into
Microsoft based on its potential in the tablet arena regardless of this
rumor, the stock's valuation indicates that now may not be a bad time to
do so. At it's current market price in the $26 range, shares of MSFT
trade at a mere 8.1 times forward earnings, which sell-side analysts
expect to average EPS growth of 9-10% a year over the next half-decade.
In comparison, Apple (9.9X), Google (14.9X), Oracle Corporation (NASDAQ:ORCL) at 11.1X, and International Business Machines Corp. (NYSE:IBM) at 11.4X, are all more expensive.
But that's not all. Microsoft sits on a
mountain of operating and free cash flow nearly $60 billion high, yet
trades at a paltry 7.1 times the value of this cash, which is below both
the industry average (9.1X) and the company's own five-year historical
average (10.1X). As you can probably expect, Microsoft's cash valuation
is also cheaper than Apple (10.7X), Google (14.3X), Oracle (11.7X), and
IBM (10.9X) by a modest margin. For income investors who are a bit
hesitant on a pure value play approach, Microsoft also offers a superior
dividend in comparison to most of the other players in the mega-cap
tech arena, paying a yield of close to 3.5%.
To recap: while it's impossible to know
for certain how Microsoft will handle the Surface in the future, bears
should be careful to write off the company's tablet just yet, as it may
still have some surprises up its sleeve, so to speak. From an investing
standpoint, shares of MSFT look attractive nearly every way you slice
it, and it's possible that we'll see solid value -- and income -- based
appreciation going forward. For a longer look at Microsoft, check out its profile page on Insider Monkey.
Article Source: InsiderMonkey
Article Source: InsiderMonkey