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Why Mr. Market Just Whacked Microsoft in the Head After Good Earnings

by Brett on January 28, 2011

Microsoft reported better than expected earnings and revenue…but Mr. Market whacked MSFT anyway.

“The execution at this company has actually been pretty good over the last year,” said Ursillo, whose firm manages $150 billion, including Microsoft shares. “The stock has gotten very little credit for it because the market is worried about the continued erosion of the Windows franchise and the potential erosion of the Office franchise.” (Source: Bloomberg)

The market’s reaction probably comes as no surprise to regular readers – who know that Microsoft has no compelling play in “The Cloud”!

Microsoft stock chart price 2011

A couple of weeks back, we expressed skepticism in the “value” many drooled over in MSFT…

***

(Excerpted from: A Casual Stroll Down Tech Valuation Lane)

What a difference a decade makes, huh?

Remember in 2002 when Apple was trading in the low teens, not far above the cash on its books?  This was before iTunes was released, and long before the iPod, iPhone, and iPad.

The Mac looked like it was dead in the water – permanently confined to the artistic class.

And Microsoft was Master of the Tech Universe!  Charging $299 a pop for their shoddy Windows OS – sure it was highway robbery, but what choice did consumers have?

Microsoft stock price chart 2011Source: StockCharts.com

And so we see in hindsight, once again, nothing fails like success – especially monopolies.  Microsoft continued to make its OS worse, its software worse – the more developers they tossed at a project, the crappier it’d turn out.

But, argued Microsoft bulls, at the end of the day, they still had a monopoly.

Perhaps they did – on 1990’s/2000’s computing technology, that is!  But a funny thing happened on the way to monopolistic heaven – and that, my friend, was the Cloud.

To the cloud!

Yes, the magical Cloud that Microsoft ads now boast about – you know, the ones that don’t ACTUALLY feature any software in the cloud – is the same cloud that’s leaving Microsoft in the dust.

Make no mistake about it, Microsoft is a complete disaster.  They have not been able to develop good software in many years.  They’ve continued to throw more and more developers at their products, which paradoxically is the WORST thing you can do when it comes to software development.

Because, building software is not like building a bridge, where more manpower can actually help.  With software, too many cooks in the kitchen can quickly lead to diminishing returns, and more likely, negative returns, for every extra coder you toss in the pot.

The cloud’s emergence is hurting Microsoft in two big ways:

  1. It’s making the desktop operating system obsolete – not good if you happen to have a monopoly on desktop OS’s
  2. It’s making software really easy to develop (and distribute, too)

Let me give you an example  near and dear to my heart – my software startup, Chrometa, built a very slick time management desktop/cloud combo app (if I do say so myself) with four guys.  Count ‘em: 1,2,3,4!

This is the future of software – get a few talented developers, and build a web app that solves a very specific problem.  Then, make sure you have an open API, so that your app can talk and exchange data seamlessly with other apps – which are likely built by other small dev teams.

GONE are the days when you need to throw hundreds of developers at a project – it’s now counterproductive!  It’d take Microsoft years to get our product past the drawing board alone.

They are just not well adapted for software development in the year 2011 and beyond, in my opinion.  You don’t need complicated specs and a huge dev team – you need one really good developer, and a market ready to validate what you built.  Then you iterate on feedback – which you can do quickly, because development on the web can move very fast.

By the time Microsoft has finished their initial specs, you’ve been able to iterate tens or hundreds of times on your app.  Ballgame over – the small dev team wins!

So while Microsoft’s stock may look cheap, it probably SHOULD be cheap.

It all went downhill when Bill Gates – the product guy – left the company, and started turning his focus towards saving Africa.  Not that there’s anything wrong with that…unless you’re a Microsoft shareholder.

After all – would you feel good about investing in a software company run by a socially awkward bean counter?

‘Nuff said on MSFT.

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Forbes blogger Adam Hartung astutely weighed in around the same time, recommending that investors buy Apple, short MSFT in 2011.  So far, so good on the latter half of that trade, Adam!


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