Microsoft Set For Great Growth Ahead
Earlier in July, Microsoft Corporation (NASDAQ: MSFT) CEO Steve Ballmer unveiled an ambitious realignment program dubbed ‘One Microsoft.’ The initiative, which was sent to all Microsoft Corporation (NASDAQ: MSFT) employees as an internal memo, is aimed at transforming the tech bigwig into a devices and services company. This program will be achieved through uprooting bureaucracy, improving communication, and enhancing innovation. In line with this agenda, Microsoft went on to announce its intended $7.2 billion acquisition of Nokia’s (NYSE: NOK) handset unit.
In view of Microsoft’s renewed approach to business, analysts have expressed divergent views as to whether Microsoft Corporation (NASDAQ: MSFT) will or will not restore growth. What analysts firmly agree on is the fact that Microsoft’s fate will be determined by how it handles its transition into devices and services.
Early Signs Of Victory
While winning one battle isn’t a guarantee of final victory, it is a step in the right direction. In the past quarter, Microsoft recorded stellar earnings. For the first quarter of fiscal 2014, the Redmond based tech giant posted $5.24 billion in net income on sales of $18.53 billion. This is a remarkable improvement from net income of $4.47 billion on revenue of $16.01 billion in the year-ago quarter.
Perhaps the only red flag (though expected) in the earnings was the dip in Windows OEM revenue, which slipped 7% year-on-year. Nonetheless, the main headline in the earnings was the fact that Microsoft was able to grow its top line against the backdrop of a continued decline in the PC sector, a segment that has been a strong cash cow for the company.
For the sake of context, PC shipments slipped for the sixth consecutive quarter during the third quarter. Research firm IDC expects that the trend will hold in the fourth quarter, strengthening the case that there is no end in sight for this protracted slip in PC shipments. IDC figures indicate that PC shipments fell 7.6% year-on-year to 81.6 million units during the third quarter, while Gartner estimates that shipments fell 8.6% year-on-year to 80.28 million units over the same period. This slip in shipments has visibly squeezed Microsoft, which has been compelled to look for ways to offset the PC slump and protect its margins.
Enterprise And Consumer Hardware Offset PC Slip
Microsoft’s enterprise and gaming segments have been identified as the new growth pillars that will offset the PC slump and provide a healthy flow of income before the mobile agenda comes to fruition.
Web-based cloud services and the Lync instant messaging and voice software greatly boosted enterprise sales during the past quarter. Similarly, sales for consumer hardware (game consoles and Surface tablets included) tracked upward 37% year-on-year to come in at $1.49 billion. Going forward, Microsoft’s revenue from consumer hardware is expected to take an even higher upturn in light of its new game console, Xbox One.
With a healthy P/E ratio of 13.07 and a forward P/E ratio of 11.35, Microsoft has a great valuation when compared with other industry peers like Google Inc. (NASDAQ: GOOG) and Yahoo! Inc. (NASDAQ: YHOO) which both have current P/E ratios of above 27. Given these fundamentals, Microsoft is a relatively cheap stock with great growth potential.
Disclosure: The author has no position in the stocks mentioned in this article, and does not intend to initiate any position in the next 48 hours.