Microsoft Should Get Its Mojo Back

05/29/2007 12:00 am EST

Focus:

John Buckingham

Editor, The Prudent Speculator

John Buckingham, in the Prudent Speculator TechValue Report, argues that although Microsoft has lost ground to some serious competitors, it will continue to be a leader in some areas and will make good progress in others.

It would seem that much of the tech world awaits with great expectation that day when Microsoft (NASDAQ: MSFT) implodes from its inability to evolve, a slothfulness induced by decades of monopolistic gluttony. Yet Microsoft has been busy trying out a number of new platforms and business models. None will prove as gigantic a success as have the Windows or Office platforms. But new avenues for growth will emerge, justifying our continued attraction to the shares.

Though the valuation isn’t a lot different, much else has changed in the story since May 15, 2005, when we last highlighted Microsoft. [The Windows operating system] Vista was late—and late again—while the Office 2007 redesign, say the experts, will create hangover-inducing transition troubles for typists and financial model jockeys everywhere. And Microsoft’s efforts to gain relevance in online search have failed, at least according to market share numbers.

The tech world view is that these missteps are just the beginning of the end; that the market is evolving toward one in which software doesn’t reside on the PC [but] in the network, on dedicated servers. At the end of that transition, Google will be the one to plunge the knife into Microsoft’s heart to end its great dynasty.

We would suggest readers check out Google Docs and Spreadsheets first hand. Relish in their simplicity. Bask in their get-anywhere accessibility. Just don’t try to do too much with them.

Indeed, far greater a threat to Microsoft’s dominance are the PC-resident Linux (and Apple) operating systems and the productivity applications that run on top of them. Yet those threats have existed for years, and in the nine months ending March of this year, Microsoft still managed to grow revenue more than 16% to $37.75 billion.

Microsoft can’t just drop the app and head to the Web. In plotting new courses using methodical, intermediate steps, Microsoft can ensure that it increases commitments only to those models that over the long term can be successful. For sure, none of the latest efforts—gaming, music, mobile, TV—has generated even a fraction of the stable, substantial profit created by the Windows/Office engine. But we can foresee a day when one or two just might.

It’s not the cheapest stock we own, but we think it’s one of the most valuable. Not expecting the company to surprise us with the next great new thing, Microsoft should continue to create new avenues for growth while slowly evolving its mainstay Windows and Office platforms, as we look for at least $50 per share for our patience. (The stock closed at $30.48 Friday—Editor.)

(Editor’s Note: InterShow, which owns MoneyShow.com, has a partnership with Microsoft’s MSN Money investing portal.)

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