Windows proves Microsoft isn't dead
The company's stock surges on growth in its flagship software business. But what's next?
By Jeff Reeves
Microsoft (MSFT) gets kicked around as the unloved stepchild of tech. As everyone touts the evolution of consumer and business technology into a "post-PC" world, you can’t help but wonder how the company will stay on top.
Well, don't start carving Microsoft's tombstone just yet. The tech giant announced its third-quarter earnings results after the bell Thursday, surprising analysts with some record numbers and sending shares surging almost 6% Friday.(Microsoft owns and publishes Top Stocks, an MSN Money site.)
The reasons included a revamped line of legacy software, as well as some impressive growth in newer business ventures that show Microsoft is indeed evolving beyond its bread-and-butter Windows operating system.
Here are the details: Microsoft's quarterly revenue was up 6% compared with the year-ago period's $17.41 billion, while operating income increased by 12% to $6.37 billion. Gains of between 4% and 14% were reported in most divisions, including the mainstay Windows business.
That is reason enough for optimism in the short term. But in case you think this is just one good quarter, CEO Steve Ballmer gave investors reason to be optimistic about the months and years ahead, too.
Microsoft is bringing a series of highly anticipated new products to market this year, including Windows 8 for PCs and tablets. The move is meant to integrate mobile and desktop experiences, something that could connect big with many folks. More importantly, it could help MSFT go post-PC without abandoning its dominance in the laptop and desktop markets. There's also a new version of its flagship Office software suite, with cloud computing features.
So is Microsoft back in the saddle and worth investing in? Maybe. MSFT is up about 2% in the past 30 days -- outperforming not just the broader Dow Jones but also tech darling Apple (AAPL). It's no surprise StockPickr founder James Altucher has enough confidence in it to make MSFT his pick for InvestorPlace's 10 Best Stocks for 2012 contest.
But let's not sound the all-clear just yet. Despite some decent earnings and nice software launches on the calendar, Microsoft's Entertainment & Devices division continues to struggle. Though the Microsoft Xbox 360 remains the top-selling console in the U.S. for a 15th consecutive month, revenue plummeted 16% as the company failed to follow up on the success of the Kinect motion controller. Also, the Windows Phone remains a huge disappointment -- especially when you look at the dismal results hardware partner Nokia (NOK) just reported.
It's also worth noting that net income declined to $5.1 billion from $5.2 billion last year. The EPS total beat expectations, but it's obviously much better to be growing profits and beating expectations than to see your profits stagnant.
Still, it's hard to argue against the dominance Microsoft currently enjoys, and it's encouraging to see it is looking beyond Windows to come up with new revenue streams. Wall Street certainly seems to think some of the pessimism is overblown and has driven shares up an impressive 25% year to date when you include Friday's pop -- easily three times the Dow Jones' gains. And now Microsoft stock is at a new 52-week high.
However, the million-dollar question for investors is whether Microsoft can keep this up and build on its recent successes. The company remains below its 2007 peak even after recent gains in share prices, and it will have to do much more than post one good earnings report to stay in Wall Street's good graces over the next several months.
Jeff Reeves is the editor of InvestorPlace.com, and the author of The Frugal Investor's Guide to Finding Great Stocks. Write to him at email@example.com or follow him on Twitter via @JeffReevesIP. As of this writing, Jeff Reeves did not own a position in any of the investments named here.
I agree about the others spreading FUD about MS Windows. They are all worried about the handheld seen now that Windows 8 was built for tablets all the way up to gaming PC's, I would be really worried about that specially like I said, MS is building toward the mobile market.
And to Correct Daniel Fox, Windows 98 not 97. Windows 98 came out in 98 followed by Windows 98 Second Edition in 99, with Windows 2000 for business and Millennium Edition(ME) coming out in middle of 2000 and XP launch in late 2001.
In all honesty, I don't think we need 8 this early on the desktop as 7 is the Best and most stable by far. I agree with needing it in the handheld though. Desktop users should just get a service Pak or a cheaper downloadable content for like $50 with a Key.
Good luck MS, you're one of the main reasons we are where we are today! (Your touch tables are one of the coolest tech gizmos so far.)
I don't understand how anyone could say Microsoft is not dead because of Windows.
Windows 95 came out. Then windows 97. Then windows 2000. Windows Millenium came one year after that! Windows XP came out one year after that and is still being used by over 25% of computers and almost 70% of business. XP had a good run for 5 years before Vista came out in 2007. For those keeping track, that is 4 upgrades in 10 years! If you had a windows 97 computer (and the hardware magically managed to keep up) you could have upgraded it to 2K, ME, XP and Vista before the computer was 10 years old.
Vista was a nightmare. No one liked it so just 2 years later, they released windows 7. Granted it has been 3 years after the release of Windows 7 but it's still nothing compared to the 5 year run that XP had. XP still has the majority of the market share over 10 years later. When that changes to newer software, that is when microsoft is not dead.
In the meanwhile, it's just Microsoft throwing everything against the wall and seeing what sticks.
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After enjoying a smooth rise in stock prices since May, investors are about to be hit with another bout of volatility.
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