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Microsoft still has problems

Mr. Softy is buzzing these days. Microsoft (NASDAQ: MSFT) stock hit a new five-year high earlier this month, and it moved higher this past week on positive developments with its Windows 8.1 update for its flagship operating system.

However, we can’t kid ourselves. Microsoft still has a lot of problems. We were reminded last Friday, when Morgan Stanley analyst Katy Huberty slashed her forecast for the PC market this year. She now sees a 10% decline in PC units shipping this quarter, revised lower from her earlier prediction of a mere 5% decline.

Yes, she did consider the generally well-received Windows 8 update from earlier in the week. Folks just aren’t buying desktops and laptops the way they used to, and that shines a brighter light on Microsoft’s shortcomings in the areas that are growing.

Tablets and smartphones are the computing gadgets that are growing these days, and Microsoft trails Apple‘s (NASDAQ: AAPL) iOS and Google‘s (NASDAQ: GOOG) Android badly on both fronts.

Being a distant bronze medalist isn’t fun. It has to shell out payments to hardware makers to support its devices the way it does with Nokia (NYSE: NOK) to get its Lumia phones out there. It has to create financial incentives to get developers of the more popular iOS and Android apps to commit to Windows versions of the programs.

Even an area where Microsoft’s lead seemed safe in the US — video games via its Xbox 360 — is now in question, after some poorly received restrictive features found gamers shifting their support to rival consoles. Microsoft’s eventual about-face on that front was the right call, but it still will have to win back the trust of gamers this holiday shopping season.

Microsoft is growing despite all of the headwinds. Analysts see revenue growing 7% in the fiscal year that ends this weekend, and those same pros are targeting 8% top-line growth through the next 12 months. However, these are uneasy growth targets, as so many of the areas where Microsoft dominated have never been this susceptible to disrupting.

Microsoft stock keeps inching higher through the uncertainties. Apple — despite being far ahead of Microsoft in the smartphone and tablet markets that are still growing — is trading 44% below last year’s highs.

Apple isn’t perfect, naturally, but should both stocks be trading for 11 times forward earnings? Google is fetching a loftier 16 times next year’s earnings, but it’s the top dog in mobile operating systems. Big G is also growing considerably faster than Microsoft.

Don’t confuse Microsoft’s buoyant share price with fundamentals that are certainly not the best we’ve seen at the company in the past five years.

Microsoft has problems. Microsoft stock just isn’t priced that way.

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A version of this article, written by Rick Munarriz, originally appeared on fool.com.

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