MICROSOFT for Investors and Users
- Microsoft performance in 2015 is mirroring that of IBM.
- Windows 10 is an effort to make Microsoft’s ecosystem run more like Apple’s.
- If it works, and Microsoft succeeds in becoming its own OEM, the stock could rocket upward.
A funny thing happened on the way to Windows 10.
Microsoft (NASDAQ:MSFT) became IBM (NYSE:IBM).
During 2015 action in the two stocks has increasingly mirrored one another. It’s a hamster wheel to nowhere, with IBM up less than 1% so far and Microsoft down less than 1%.
The companies aren’t identical, of course. Microsoft is still selling at four times sales while IBM is at about 1.5 times. Microsoft’s soft earnings have sent its Price/Earnings multiple skyrocketing to 36 while IBM is at barely 10. But to investors, their prospects for growth appear to be the same.
What this tells me is that CEO Satya Nadella is getting no credit for Microsoft’s growing strength in the cloud, no credit for the success of Xbox, and no hope of making Windows 10 into a growth catalyst.
What if the analyst capitulation is wrong?
The point of Windows 10 is not to make Microsoft big in mobile. It’s to make PCs, which we think of as deskbound, into products that work, and feel, more like mobile devices. Currently PCs come in two flavors, big boxes that sit under desks (hereinafter called servers) and laptops that may or may not be mobile. The point of Windows 10 is to encourage an upgrade cycle, to get those laptops off desks and into the field. That’s the whole idea of the Microsoft Surface design, to separate processing and display from storage the way a detachable keyboard is folded under a tablet base.
Under Nadella, Microsoft is increasingly its own OEM. That’s working for the XBox, and the Surface is turning the corner toward profitability. Being your own OEM doesn’t necessarily doom you to low profits. Apple (NASDAQ:AAPL) is doing fine. But it should mean a fatter top line over time.
A lot depends on how secure Windows 10 turns out to be. What Apple has, and Google (NASDAQ:GOOG) (NASDAQ:GOOGL) Android lacks, is tight integration in this area. If there’s insecurity in iOS a patch can be delivered quickly, even transparently. Android, which is now suffering from discovery of yet-another flaw through which text messages can deliver a malware payload, upgrades much more slowly because of a welter of business arrangements among OEMs and carriers that Google has yet to control.
To the extent that Microsoft wants to be Apple, this security issue will be key. And it’s important because Microsoft has a reputation for software that lets malware thrive. Taking control, which includes taking responsibility, changes the game.
Right now, investors are discounting all of this. They say, “Same old Microsoft, another version of Windows.” But this isn’t your father’s Windows. It’s Microsoft’s first attempt to truly emulate Apple in the way its product ecosystem runs.
You’re right to be skeptical. Betting that Microsoft can get it right is pure speculation. But if Windows 10 can get it right the client business is a new ballgame, and Microsoft could start looking more like a FANG stock over the next year.