The Ballmer Days Are Over

An insane valuation? At the start of January 2000, Microsoft's most recent earnings per share was $0.90. It's share price was about $58 dollars. This would have given it a P/E ratio of about 64x. This was relatively tame by dot com standards.

MSFT's current P/E ratio is about 10x. Just looking at that number right there, most people would conclude that MSFT was a great value play. In my personal opinion it is indeed a great value play - but not so long as Ballmer is still calling the shots.

If market prices were solely set based on income then you would be right; the price would eventually rise regardless of whether Ballmer remained at the helm or not. However, market prices are more complex than this. They also incorporate expectations for the future. It is here where MSFT's current problem is.

If you look at the components of MSFT's cash flow their major income sources are the Windows Operating System and the MS Office Suite. It is unbelievable that either revenue source will suddenly evaporate.

The problem is that both of MSFT's core business functions are under pressure. This pressure is coming from the decreasing dominance of the PC as the digital platform of choice and the increasing prevalence of Internet-based solutions to problems that were previously solved by offline software packages.

While MSFT is currently conducting expansions into a large array of industries, it is unlikely to dominate these industries to the same degree that it currently dominates the desktop sphere. In all of the industries where MSFT is trying to expand its footprint it faces vigorous competition from fairly formidable competitors. Even in its core industries, challenges are appearing on the horizon. Here's just a really quick summary:

1. Video Gaming - Nintendo, Sony, Apple? (Perhaps for "casual" gamers only, but I am not well versed enough to know how serious of a contender Apple is as of yet)

2. Tablets/Mobile - Google, Apple, HP

3. Search/Advertising - Google (Look, this is a big enough fish, I don't even need to name anything else)

4. Operating Systems - Google (ChromOS in the distant? future, Android everywhere, tablets eating market share), Apple (tablet popularity may erode Windows market share)

5. Server & Server Tools - ORCL, Linux, IBM, etc, etc, etc

6. Microsoft Office - Nothing serious yet, but GOOG is salivating at a chance to chip away at this

Market prices incorporate expectations for future growth as well as performance relative to peers. In the near term Microsoft is making buckets and buckets of solid cash. In the medium term, there are threats on the horizon that are looming large. In the long term, there is a great deal of uncertainty and this uncertainty is not made any better by strange moves like acquiring Skype for $8.5 billion.

I have heard some people say that acquiring Skype was a defensive move. Look, defensive moves like that are the last ditch strategy of someone that knows they are losing. There were a billion strategies that could have been taken that would have yielded a better strategic position.

What Microsoft needs is a visionary leader that can turn its buckets of cash into something that can carve out a substantial, permanent, and secure foothold on one of the fronts that they are fighting. That sounds cliche, but it is what they really need right now.

Microsoft is a fantastic company with an amazing amount of talent in it. I actually believe that it has some incredible earnings potential, but unlocking this potential will take bold, aggressive moves - not expensive defensive posturing.

It is not my intention to bash Microsoft. I have a lot of respect for the company. However, something obviously needs to change in response to the new challenges that they are facing. The status quo is no longer good enough.

Sources:

Edgar online for the year 2000 10-Q filing, yahoo finance for price in 2000, http://www.betanews.com/joewilcox/article/Microsoft-Q3-2011-... for revenue break down.

I apologize in advance for any formatting strangeness in this post. In my defense - I am new here, and it is 1:31 am.

I think it's a disservice to Ballmer to not consider that every business goes up and down.

This chart (courtesy turar) is the real story -> http://ycharts.com/companies/MSFT/net_income#compCos=AAPL,GO...

It just bothers all the Silicon Valley tech press that Microsoft continues to thrash its competitors.

Google makes money via search. Apple started off with fucking mp3 players and now makes 'post-PC' devices.

It just bothers SiValley that no one can touch the Windows domination.

Microsoft made $5 billion+ in profit last quarter. The CEO who's been in charge for the last 10 years should be given a prize for surviving and growing the company's profits.

A new emerging company will always have more room to grow. If you consider each company at its core competency they are all dominating.

Google has 64% or so search share. Bing+yahoo get 30% or so. Microsoft has 90%+ desktop OS share. After 16 or 20 continuous quarters of growth Mac is still less than 10%. Apple is dominating smartphones (though Android might slow it down, notably without making any profit itself - unless you want to count it as a defence for mobile search). It's also dominating Tablets and trying to change things - because it doesn't want to fight Microsoft head-on in PCs - Just too difficult given Microsoft's advantages.

So each company is dominating its niche and trying to find ways to make its niche dominate the entire tech landscape.

Microsoft still being so dominant and the success of Windows 7 point to Sinofsky and Ballmer being God level. Growing profits from a couple of billion a quarter to $5 billion to $6 billion a quarter is extremely impressive.

Apple's growth is more impressive - However, that doesn't mean Microsoft's profits are unimpressive and it'd be foolish to take your personal dislike of Microsoft as a reason to discount some really solid work by CEO Ballmer.

Finally, Ballmer's first duty is to Microsoft and himself and Gate and Microsoft people. Who fucking cares what the vultures of Wall Street and shareholders who don't do squat think.

Interesting. If a company pays dividends, does that mean it doesn't have confidence that it can make as much money as its investors could make by investing their money elsewhere?

Actually, I think it is that whether bad memories can get institutionalised. If Balmer leaves, that body of bad memories will be gone, and people more willing to take risks again. We need to remember the software landscape has changed considerably. What might not be permissible of Microsoft in the 90s may now be fair game.