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Microsoft: Good Earnings, but I’m not Buying

After a good earnings report last month, Microsoft shares rose to almost a two-year high… and have risen since. That’s a decent start to 2012, after the stock fell -7% last year. But I’m not buying.

Revenue for the world’s largest software company rose 7% from one year ago to $17.3 billion. A good portion of the gains were on sales from the Business division, with Office products like Word and Excel, which rose 2.8%. And sales from the Xbox unit topped projections (after setting a record for US sales in the week after Thanksgiving).

And there was less red ink flowing from the company’s online services unit, which lost $494 million…the smallest loss in the past seven quarters. Since Microsoft launched Bing in 2009, it has cost the company something like $5 billion.

But the report signaled problems, too. Revenue from the company’s Windows operating system fell -6% …and has fallen short of expectations in four out of the last five quarters.

That means Microsoft has had to rely on corporate demand for Office products to hold up earnings and balance out declines. And it helps that many of the company’s business customers have multi-year agreements, which has smoothed out fluctuations in demand. But the company is well aware of the headwinds it is facing in the PC market (it estimates that PC sales fell somewhere between 2 to 4%). More to the point, tablet sales are expected to climb to 383.3 million by 2017 from 72.7 million last year (according to the NDP Display Search Quarterly Tablet Report). There is little doubt that rising tablet sales will mean a ‘cannibalization’ of some of the PC market. Granted, Windows and Office aren’t the only things that Microsoft makes, but they are the products that gave it something of a monopoly.

As much as the stock has risen over 16% so far this year, after long being considered dead money, I’m not buying in. The stock has gone nowhere over the past decade (it’s down -1.05% for the past ten years). And I don’t think there is a huge upside here. Microsoft still looks big, slow, and non-innovative. This is one opportunity I would pass up.


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