Why Microsoft's Stock Is At A Five-Year High Even Though The PC Business Is Imploding

steve ballmer microsoft

Things could not be going worse for Microsoft.

Its long-dreaded nightmare scenario is playing out. The PC industry as we’ve known it is totally collapsing. PC sales fell 14% in the first quarter, according to IDC, the worst ever drop in history.

Microsoft’s new Windows 8 operating system is accelerating the collapse, says IDC. The tile-interface is scaring consumers. Microsoft is scrambling to fix Windows 8 to address these concerns.

Even if it fixes Windows 8, it could be too late.

Its biggest rivals — Apple and Google — have taken complete control of the next major computing platforms. Apple owns tablet computing. Google owns mobile computing.

Microsoft is trying to make a dent in these markets but its being met with a wave of consumer indifference. It has 3.2% of the smartphone market and 3.7% of the tablet market.

Microsoft’s normally listless stock has seen all of this terrible news and made a sharp move, soaring 26% this year, reaching a five-year high.

Wait. What?

That’s right, Microsoft is trading just over $34 a share right now, despite the fact that the worst fears for the Windows franchise have been confirmed.

What gives?

For the longest time, the destruction of Windows has been hanging over Microsoft’s head. Now that it’s here, and really, it’s not so bad, investors seem to feel better about the company.

Last quarter, Microsoft reported $18.8 billion in revenue, an 8% increase on a year-over-year basis. Its Windows division did $4.6 billion in revenue, which is about flat on a year-over-year basis. (These revenue numbers are non-GAAP. They exclude Windows upgrade revenues counted in the quarter.)

The Windows business is flat, despite the overall PC market falling, because Microsoft’s Surface tablet, plus licenses to businesses made up for the shortfall. Microsoft’s Windows business isn’t entirely tied to consumer PC sales. It sells to corporations in multi-year deals.

The reason Microsoft’s overall revenue grew is that its a strongly diversified business. While CEO Steve Ballmer has regrettably repeated the importance of Microsoft’s consumer businesses, the truth is that Servers and Tools, and the Business Division (home to Office) are driving Microsoft. Servers and Tools was up 11%. The Business Division was up 8%.

Earlier this year, Microsoft got a nice boost when hedge fund ValueAct announced that it was going to invest $2 billion in Microsoft’s stock.

ValueAct CEO Jeffery Ubben explained the investment by saying, “In three to five years, which is our time horizon, we’ll stop talking about PC cycles and instead talk about Microsoft as the largest cloud-computing company in the world.”

A lot funds have bought into Microsoft in the past and been burnt. It’s possible ValueAct is burnt, as well. It’s also possible that this is a temporary blip for Microsoft.

But it looks like Microsoft is actually being positioned as a strong enterprise company that can handle a weakening global PC market.

Turns out Microsoft’s nightmare scenario isn’t that bad after all.

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