THE MICROSOFT INVESTOR: Microsoft Faces Unresolved Questions Over Its Strategy

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Microsoft CEO Steve Ballmer leans to his right

MSFT Continues To Slide 
Stocks are in the red in early trading as investors worry about the state of the global economy and whether Greece’s debt crisis will affect the rest of Europe. In the U.S., people are applying for fewer unemployment benefits, reversing the spike seen last week. Shares of MSFT are down, continuing the recent slide. Upcoming catalysts include entrance in the tablet market; Windows Phone 7 adoption with hardware partner Nokia; strides against current market leaders in cloud computing; making money in the online business including integration of Skype and improving the search business (retooling the Bing / Yahoo! partnership or just buying them outright); and continued momentum of Kinect and the next generation console. The stock currently trades at 8x Enterprise Value / TTM Free Cash Flow, inexpensive compared to historical trading multiples.

What Does Wall Street Think Of The Skype Acquisition? (Barron’s)
It’s a mixed bag:

  • Walter Pritchard with Citigroup thinks the deal “makes sense” and gives Microsoft possible “leverage” Integration with Kinect or WP7 could drive meaningful competitive advantages.
  • Tavis McCourt with Morgan Keegan sees benefit to the Nokia / Microsoft partnership as “video and voice services will require more headsets and video bridging hardware.” It also could complicated negotiations with telcos.
  • Craig Moffett with Sanford Bernstein echos those fears. “Perhaps it was the threat of Facebook acquiring Skype that moved Microsoft to pay 10 times revenues. Just don’t expect the carriers to be amused.”
  • Adam Holt with Morgan Stanley notes that it was likely a patent buy as Skype has 13 patents and over 400 patents pending. And though the valuation is rich, Skype’s metrics have been improving and the company is gaining more importance in social networking.

Is Skype Just Another Overpriced, Go Nowhere Acquisition? (The Microsoft Blog)
Microsoft paid a dot-com era price for Skype at almost 40% more than the service itself says the business is worth. As such, Microsoft shares took a stumble the last few days. Microsoft’s $8.5 billion price tag for Skype is nearly 3x what eBay sold the company for in 2009 ($2.9 billion). This could be just another case of Microsoft overpaying for something that it will eventually kill; Massive, TellMe, AdECN…I could go on.

Lose Ballmer Or Simplify (The Financial Times)
The real difficulty Microsoft faces is unresolved questions over its strategy and its ability to fulfil ambitions. And Steve Ballmer does not look like a man with the answers. Having “an ambitious, forward-looking, irrepressible nature” as he described is one thing. Having the ideas, discipline and focus to defeat a disparate array of competitors in many fields is quite another. Microsoft either needs to find itself a new leader or simplify itself sufficiently so it can achieve fewer things faster and better.

Bing Inches Up In Market Share For April (comScore)
Microsoft’s Bing search engine, as well as Yahoo, saw slight gains in search market share in April, but not enough to gain much ground on Google. Google led search-engine traffic in April was 65.4%, down slightly (0.3%) from March, according to comScore. Yahoo! came in at 15.9%, up 0.2%, with Bing bringing in 14.1%, also up 0.2%. Combined market share of Microsoft and Yahoo! Was 30%, less than half of Google. Glad that online business cash burn is being put to good use. Read more at Business Insider.

Chromebooks Going After Microsoft’s Jugular (Various via techDygest)
Google finally launched Chrome OS-powered Chromebooks. Chromebooks will be available in June for $20 a month for students and $28 for enterprises. The word consumer was not mentioned. Meaning Google is going after Microsoft’s bread and butter, the corporate IT department. Matt Rosoff at Business Insider says that has to put Steve Ballmer into a sweat.