Tag Archives: Microsoft

earnings calls: Apple (AAPL) vs. Microsoft (MSFT)

July 23, 2014 By in cloud services, earnings conference calls, internet, software, Stock ideas, Technology, Video games, Wireless Tags: , , , Leave a comment

Last night after the market close, AAPL reported earnings per share that beat the consensus of Wall Street analysts–and the stock went down in the after-market.  MSFT, in contrast, reported results that fell short of analysts’ estimates–and the stock went up!

What’s going on?

AAPL gave next-quarter guidance that fell below Wall Street’s projection–but it always does this, so that’s not the reason.  MSFT’s income statement looks better after factoring out the large operating loss generated by Nokia, but I don’t think that’s the reason for the market’s positive response, either.  After all, if you wanted to (I didn’t), you could have gotten a reasonable guess at how much Nokia would subtract from the MSFT total from Nokia’s recent results as a stand-alone company.

I think the market’s response is much more a a conceptual response.

Tim Cook has made it clear that AAPL is a manufacturer of high-end mobile consumer technology.  There’s no “next big thing” on the horizon, however, with only a periodic refresh of the company’s smartphone line due any time soon.  If reports from suppliers are accurate, new offerings will include a phone with a large, Samsung Galaxy-matching screen size, and a(n even larger) tablet/phone.  For Jobs-ites, this departure from Steve’s view that phones should be small enough to operate with one hand may be earth-shaking.  But for the rest of the world, this is only catching up to what Samsung already has on the market.  So a ho-hum Wall Street response is appropriate.

For MSFT, on the other hand, the news is relatively better.  The company seems to have a focus for the first time in a long while.  The fact that Nokia is putting up operating losses at a near-$3 billion annual rate seems to me to justify the downsizing MSFT has recently announced.  The only surprise is that this wasn’t started sooner.

Leaving the X-Box content creation business is probably more symbolic than anything else, but it removes a potential distraction–especially given the continual mess the company has typically made of its game software development efforts.

One, admittedly small, figure what caught my eye was that MSFT has added another 1,000,000 individual/small business users to its Office 365 rolls during the June quarter.  I think this just shows the power of the cloud–easier administration, much lower cost-of-goods expense, and hugely better protection against counterfeiting.

For MSFT, then, the earnings were nice, but the fact that the company’s board is allowing significant changes is nicer.  True, the message may turn out only to be that the company will try harder not to shoot itself in the foot again, but even that’s an uptick.  Hence the positive market response.  Absence of missteps won’t be good enough for long, but it’s ok for now.

buying Microsoft (MSFT) !?!

March 19, 2014 By in Industry Analysis, Recent Market Action, semiconductor manufacturing, software, Stock ideas, Technology Tags: , , , , , 1 Comment

Yes, that’s what I’m beginning to do.  I’ve bought a small amount and intend to add to it on weakness.

For me, this is an unusual step, since MSFT isn’t exactly what you’d call a growth stock.  Quite the opposite.  It’s a value idea.  I’ve been building to it for some time, though.  I few months ago I wrote that in a year like 2014, where I imagined (and still do) that a stock that’s up by 10% will be an outperformer, the bar is set pretty low.  And after thirteen years of decline vs. stocks in general, the news that the company had dysfunctional management and had gone ex growth had been pretty thoroughly worked into the stock price.  My son-in-law told me it’s the nicest thing he’s ever heard me say about MSFT.  (It was a big part of my portfolios all through the 1990s, however.)

I also privately scoffed at prominent value managers who loaded up on MSFT several years ago purely on the notion that the stock was cheap, ignoring the issue that change of control was well-nigh impossible.

What’s changed?   …or, better, what’s changed my mind?

As I mentioned above, the market situation is one thing.

The stock’s metrics haven’t moved much:  steady cash flow of $3+ a share, earnings of $2.75, a dividend yield of just under 3%.

There’s a chance earnings may improve over the next few years:

–the board of directors has put new top management in place.  A cadre of looks-good-in-a-suit-but-doesn’t-do-much lieutenants are disappearing, as well.  There’s no guarantee that the new guys are any better than the old.  On the other hand, it’s hard to imagine they’ll be worse.

–Apple’s failure to produce an adequate alternative to the Office suite has limited the inroads it can make into MSFT’s corporate market.

–Windows 8 (I just got a new touch-screen laptop) is pretty good–very iPad-ish.

–a new generation of Intel chips + the emergence of Samsung, Asus (my brand), Acer and Lenovo making high-quality products may well reenergize the US consumer market.  Much lighter weight, high-resolution screens, instant-on and touchscreens may counter some tablet momentum.

–with its consumer/small business products, MSFT has had a continuing (large) piracy problem.  The shift to the cloud will help police that.

–new management may do good things.  Even if not, the idea that the company is turning a new page will likely support the stock until we can make a better judgment.

Microsoft (MSFT)–a stock for 2014?

November 27, 2013 By in Current Market Thoughts, Stock ideas Tags: , , , , , 1 Comment

Just a thought, not a recommendation.

 

In some ways, I find it hard to believe that I’m writing this.  I’ve been mentally making fun of the value investors who have witlessly piling into MSFT over the past several years.

What’s wrong with them, I thought.  The stock is trading at 4x book value, a statistic they used to beat growth investors over the head with as an obvious indication of preposterous overvaluation.  More important, don’t they realize how weak the current management is?  …and how deeply entrenched the top is through personal friendship with founder Bill Gates?  If a decade+ of squandering corporate resources isn’t enough to force change, what would be?

Perversely, the golden goose of the Office suite has still been laying enough eggs not to impinge on the personal lifestyle of Mr. Gates, so there has been no practical reason for him to question the way his company is being run.  And Gates’ public statements show him to be very deeply committed to providing jobs for his friends.

What has changed, you ask?

Two things:

–Steve Ballmer, Bill’s now-billionaire college friend, is out.   …and the search for a successor looks to be going far beyond the ususal (for MSFT) well-dressed, glib self-marketers to  include people with actual management credentials.  So maybe change is possible, after all.

–2014 may well be an average year in terms of gains, meaning that a stock that goes up by 10% (remember, MSFT has an above average dividend, too) will probably be an outperformer.  So the bar is set pretty low.  Earnings don’t necessarily need to show any acceleration, either.  MSFT has been trading at about 2/3 of the market PE multiple for the past several years.  Just the idea that the status quo is no longer acceptable to the MSFT board may be enough to give the stock the boost it needs.

 

 

Microsoft (MSFT) buying the Nook e-reader?

May 10, 2013 By in Current Market Thoughts, e-readers, Industry Analysis, Publishing, Stock ideas Tags: , , , , , , , , Leave a comment

the news

Yesterday, the stock of Barnes and Noble (BKS) soared 22% on more than 10x normal volume.

The reason?

…a TechCrunch post saying MSFT is preparing a $1 billion offer for the company’s Nook-related digital assets.  The assets are held in BKS’s Nook Media subsidiary, which also contains the company’s college bookstore operations.  Leonard Riggio, who controls 31% of BKS, owned the college bookstore business privately but sold it it BKS in 2009 for $514 million.

The TechCrunch report is based on its examination of internal MSFTdocuments which the New York Times says are genuine, though perhaps dated.

is the headline figure, $1 billion, all that it seems?

Maybe not.  The most favorable interpretation of the TC scoop is that MSFT is willing to pay $1 billion for the portion of the BKS digital assets it doesn’t already own.  The least favorable is that the offer values the entire Nook Media at $1 billion.

The difference?  Three factors:

1.  MSFT already owns 17.6% of Nook Media.  Pearson owns another 5%.  Under the more favorable interpretation, the $1 billion would be split between Pearson and BKS, with the latter getting $940 million.  Under the less favorable, which I think is probably the correct interpretation, BKS would collect $774 million.

2.  Does the $1 billion value include the college bookstores, which–as I read the BKS financials–are the company’s most profitable operations?  If so, cut the MSFT offer in half.

3.  In its original deal with BKS, MSFT promised to fund up to $180 million in Nook R&D.  I think this was a loan, not a gift.  If so, part of the $1 billion may be forgiveness of the loan, not a new cash inflow.

In the least favorable case for BKS, subtract $500 million from the $1 billion headline number if the college book stores aren’t included.  Another $176 million represents the stock MSFT already owns.  Let’s say a further $100 million represents repayment of the R&D advance.  Then, the “$1 billion” offer would mean a cash outflow of  about $250 million, of which BKS would get about $235 million.

the Nook is bleeding red ink…

…for three reasons.

In the Darwinian world of consumer electronics, stand-alone e-readers like the Nook are an evolutionary dead end.  They’re being replaced by small, light tablets.

The Nook is an also-ran among e-readers.

As I read the BKS  financials, the company has a razor/razor blade strategy for the Nook.  It prices the device roughly at cost in the hopes of generating a lot of high-profit e-book sales from users.  In fiscal 2013 (ended in April), however, BKS appears to have lost $350 million trying to persuade consumers to take Nooks off their hands.  It’s hard for me to see how BKS can sustain deficits of this size.

why buy the Nook? 

1.  MSFT takes in $1 billion in cash every two weeks.

2.  To compete in the tablet and smartphone businesses, MSFT needs an e-reader feature.  Because of the company’s tiny market share in both businesses, developers aren’t beating down the doors in Redmond to make reading apps for it.  MSFT’s plan would apparently be to stop making e-readers and refocus the Nook division on creating/enhancing e-reader apps, especially for Windows devices.

3.  According to TechCrunch, the MSFT documents project Nook ” revenues to gradually recover, up to $1.976 billion by fiscal year 2017, for EBITDA profit of $362 million.”

Given that sales of e-readers make up the huge bulk of Nook Media’s sales, the most polite thing I can say is that this forecast is extremely optimistic.  Revenue growth appears to assume a rocketship ride for sales of digital content.  The $750 million positive swing in EBITDA looks too good to be true.  But it does make Nook Media look cheap.  My hunch is that this is its main purpose–to justify the purchase.

(One caveat:  it’s impossible for me to judge how revenues and costs for the Nook devices and for digital content are figured and split between the retail and Nook divisions of BKS.  The only way I can see for Nook Media revenues to rise without hardware sales is if the whole basis of revenue calculation is somehow changed.  EBITDA of $362 million is only plausible to me if somehow post-acquisition Nook Media’s SG&A expense of around $400 million a year completely disappears, or if somehow a whole bunch of digital content profits are now being attributed to the retail division but revert to Nook Media post-acquisition.)

For what it’s worth, TC says the MSFT documents value BKS as presently constituted at $1.66 billion.

4.  MSFT is anything but a shrewd acquirer, in my view.  Just look at its $40+ billion bid for YHOO in 2007 (it has taken a 70% rise in YHOO’s stock price over the past year for that company to recover to a market cap of $30 billion-).

5.  Nook Media may be MSFT’s best alternative–and it may feel it can’t allow the business to die.

I don’t have an investment opinion about BKS.  I don’t own the stock and I have no inclination to be a buyer.  Any holder must ask himself where he sees upside from the current level, and how much that might be.

PS:  I wonder who leaked the documents   …and why.

thinking about tablets–and ecosystems

August 9, 2012 By in Industry Analysis, internet, Publishing, Technology, Wireless Tags: , , , , , Leave a comment

my tablet

I’ve owned a iPad for several months.  I use it much more than I expected.  I’d use it even more than I do, but the AAPL “walled garden” prevents me.

My only real complaint is that the wi-fi chips AAPL uses in its tablets appear to be relatively weak, so mine (a “new” iPad) often wants to make a cellular connection.  My wife’s (an iPad 2) has the same problem.  Here on my back porch, my Macbook hooks up to our wi-fi without a problem; my iPad can’t make a connection.  Design defect  …or concession to the mobile network operators?

One more thing–I’ve spent much too much time playing Kingdom Rush.

in the schools

The iPad has picked up momentum in areas I hadn’t really thought about.  For instance:

–AAPL commented in its 3Q12 earnings call that it is beginning to sell a ton of iPads to schools.  They’re all iPad 2s, which apparently have hit a price point low enough to trigger mass orders.

–an interesting article in the Financial Times from late July outlines changes tablets are making in the scientific/medical press.  It’s short and worth reading.

professional journals

Its message is that there is a surprisingly quick transition to online delivery going on with professional journals.   For doctors’ publications, the positive points of online are:

-most physicians have and use tablets, especially for reading between patient appointments;

-doctors read close to double the amount of a journal’s content when they access it online rather than in print;

-they appear happy to watch video advertisements imbedded in the online articles; and

-the publisher has precise data to show advertisers about what online ads have been seen.  For print, the publisher has to rely on surveying users–and who’s going to say he doesn’t read the journal from cover to cover?

Googling “tablets and medical journals”

My results were mostly about the perils of sleeping pills.  But I did come across a medical student’s blog post on the merits of various tablets.   Steven Chan’s conclusions are about what you’d expect, with one exception:

–using a tablet is a lot better than carrying files around with you

–if you’re hopeless with tech, get an iPad.  It’s easy to use, but limited by the AAPL “walled garden”

–Android tablets are harder to get up and running but are much more useful

–the iPad is too big to fit into a standard white lab coat pocket.  If you use an iPad you should get a new iPad-friendly model (this is the one I didn’t think about).

my investment point?

It’s about ecosystems.   In a world of cloud storage, where individuals own multiple devices–smartphones, tablets, laptops–that they may want to function for both personal and work tasks, the choice of what products to use becomes less about how cool the individual device is and more about how the device allows one to access, share and save data.

Yes, everyone believes this, to one degree or another.  In a “cloud” world, though, AAPL has two (well-known) weaknesses, I think.  One is its “walled garden” approach, which makes it seem a little like AOL when the WorldWide Web was opening up in the 1990s.  The other is how weak AAPL’s browser and productivity software are.

Again, no secrets here.

What’s interesting, though, is how this leaves the door open for MSFT, even after more than a decade of bungling, to become relevant again.  It has an adequate browser, which seems to be losing its my-way-or-the-highway attitude.  Its productivity suite is the world standard.  More than that, MSFT seems to me to understand the new opportunity its position is giving it, and (for once) to be taking intelligent steps to exploit it.

Anyway, I’m starting to think I may have to take MSFT more seriously as a potential investment, for the first time this century.  If I only thought MSFT had good management…