Microsoft stages a big comeback
A close look at a tech giant that is trying to reinvent itself.
(Money Magazine) -- From the mid-1980s to 1999, a period that marked the rise of the PC, Microsoft made a lot of people rich: Its shares soared 59% a year.
But ever since the Internet became a legitimate force, the software giant has struggled to adapt to an increasingly web-based computing world -- and its stock price has gone nowhere.
Can Microsoft thrive and find new sources of growth in a post-PC world, where its flagship software products become less dominant?
You can't overestimate the importance of the October launch of Windows 7, the latest version of the operating system that accounts for 25% of Microsoft's revenue. Customers were so unimpressed with the last upgrade, Vista, that only 18% of computers run on it, says Net Applications. That anemic adoption rate since the 2007 release, combined with poor PC sales, cut Windows' revenue 13% in the past 12 months.
Unlike Vista, Windows 7 has so far received positive reviews. That, plus a projected uptick in PC sales in 2010 as the economy improves, means Windows sales could pick up. But since this is a mature business the firm already leads in, it's not likely to drive growth in the future.
Don't expect Microsoft's dominance in operating systems and applications software to keep leading to big profit margins, which are already down six points, to 25%, from 2005. The threat: cloud computing, in which applications run on the web.
"Look at Facebook," says Morning-star analyst Toan Tran. "It doesn't care what platform you're running." It can use Mac OS, Linux, or Google's upcoming Chrome OS.
As a result, Tran says Windows revenue "has the potential to be a rounding error" in 10 years. He thinks the firm's future is in Azure, Microsoft's cloud service that lets developers create applications on Microsoft servers. But Amazon.com (AMZN, Fortune 500), Google (GOOG, Fortune 500), and others offer similar services.
Microsoft (MSFT, Fortune 500) hopes to find growth in online advertising. A few months after launching its new search engine, Bing, its share of online searches has grown to 9% vs. Google's 65%. But the goal isn't to be No. 1, says Tom Forester of the Forester Value fund, which owns the stock.
"Even a 20% share would be huge, given how big online ads promise to be," he says. They could exceed $30 billion by 2013, says the Yankee Group. And Forester thinks Microsoft could hit 15% to 20% in a couple of years.
Under a new deal, subject to government approval, Bing will power searches on Yahoo for a cut of revenue. "Bing should march toward profitability," says Edward Jones's Andy Miedler. "That's the real test."