Should Apple Worry? Microsoft Targets Mobile Market
Monday, May 7th, 2012
By George Leong, B.Comm. for Profit Confidential
Apple Inc. (NASDAQ/AAPL) is the king of smartphones, but Microsoft Corporation (NASDAQ/MSFT) wants a big piece of the sector. In fact, Microsoft announced last Monday it would pay $300 million for a 17% stake in a new division of troubled Barnes & Noble, Inc. (NYSE/BKS) that includes the “Nook” e-book reader and downloadable material. Armed with about $58.0 billion in cash, the cost impact will be negligent to Microsoft.
It’s a bet for both companies to try to make a stronger move in the mobile space. Barnes receives a much-needed cash infusion and an app for the Microsoft-powered mobile phones. For Microsoft, the addition of the e-book reader will add to the company’s summer launch of its “Windows 8” mobile version in conjunction with Nokia Corporation (NYSE/NOK).
Microsoft traded at a 52-week high on March 16 on mounting optimism that this past Wall Street tech star will regain its lost glory in the stock market. The hope for Microsoft rests on the Windows 8 operating system and the company’s push to become a player in the lucrative but competitive smartphone and mobility sector. This is where the Barnes deal comes in. Microsoft is also faring better in the stock market with wide acceptance of its “Kinect” and “Xbox” console, which is taking market share from the “Sony PlayStation 3” and “Nintendo Wii.” In my opinion, being the owner of both the Xbox and PS3, the Xbox is better.
The stock has been a disappointment over the past decade and has been viewed as a boring technology play in the stock market with limited growth and a lack of vision.
The push into mobility and gaming should be able to add some spice to the stock, which still trades as a commodity tech stock at 10.53X its fiscal 2013 earnings per share (EPS). I feel that Microsoft deserves a higher valuation in the stock market. Steven Ballmer will need to convince Wall Street that it could be the next technology stock market starlet.
So, while the stock market has recorded impressive gains from other key tech companies, namely Apple and its $546 billion in market cap, Microsoft, with a market cap of $269 billion, has been a market laggard amongst the large mainstream technology companies. Apple will be hard to beat, as I discussed in Apple: This Technology Stock Still Has its Mojo.
I’m not saying Microsoft will become one of the top stocks, but the company could become more attractive to growth investors in the stock market. As I said, gaming is adding spice, but where I see a potentially strong surge in the stock will be dependent on its mobility business. Microsoft’s venture with Nokia to battle in the smartphone space will be critical.
I view Microsoft as a contrarian pick in the stock market. The stock market always provides opportunities and Microsoft appears to be worth a look, if the company can execute.
Microsoft has seen its stock do nothing for the past decade in the stock market, where it has been dead money for investors, while other stocks have made enormous returns.
But the time appears to be ripe for Microsoft to break out of its sleep as a boring former high-flying technology stock that needs a kick to drive up the share price and attract buyers. The company needs to generate the excitement it once had in the stock market. Merely introducing a new operating system every few years is not enough.
Microsoft also owns the hugely popular “Skype” communication application that should help to strengthen the product offering in the “Nokia Windows Phone.” I love Skype and think that Microsoft needs to push this.
Just imagine the opportunities for Microsoft given the size of the global cell phone market. There are estimated to be over five billion cell phone users, according to the United Nations. That is a lot of phones, so the battle for market share will be intense.
The demand for smartphones will continue to grow rapidly, as we see more and more content and applications move to the mobile phone. Mobile broadband is becoming more significant. There are estimated to be over one billion broadband subscribers in 2010, according to the International Telecommunication Union. This is why smartphones are becoming more critical products and why Microsoft needs to be there.
In a few years, Microsoft may become one of the stars for growth investors.