Microsoft still has problems

Folks just aren't buying desktops and laptops the way they used to

a woman

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

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.

The Australian Financial Review says "good quality Australian shares that have a long history of paying dividends are a real alternative to a term deposit." Get "3 Stocks for the Great Dividend Boom" in our special FREE report. Click here now to find out the names, stock symbols, and full research for our three favourite income ideas, all completely free!

More reading

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

More on ⏸️ Investing

Close up of baby looking puzzled
Retail Shares

What has happened to the Baby Bunting (ASX:BBN) share price this year?

It's been a volatile year so far for the Aussie nursery retailer. We take a closer look

Read more »

woman holds sign saying 'we need change' at climate change protest
ETFs

3 ASX ETFs that invest in companies fighting climate change

If you want to shift some of your investments into more ethical companies, exchange-traded funds can offer a good option

Read more »

a jewellery store attendant stands at a cabinet displaying opulent necklaces and earrings featuring diamonds and precious stones.
⏸️ Investing

The Michael Hill (ASX: MHJ) share price poised for growth

Investors will be keeping an eye on the Michael Hill International Limited (ASX: MHJ) share price today. The keen interest…

Read more »

ASX shares buy unstoppable asx share price represented by man in superman cape pointing skyward
⏸️ Investing

The Atomos (ASX:AMS) share price is up 15% in a week

The Atomos (ASX: AMS) share price has surged 15% this week. Let's look at what's ahead as the company build…

Read more »

Two people in suits arm wrestle on a black and white chess board.
Retail Shares

How does the Temple & Webster (ASX:TPW) share price stack up against Nick Scali (ASX:NCK)?

How does the Temple & Webster (ASX: TPW) share price stack up against rival furniture retailer Nick Scali Limited (ASX:…

Read more »

A medical researcher works on a bichip, indicating share price movement in ASX tech companies
Healthcare Shares

The Aroa (ASX:ARX) share price has surged 60% since its IPO

The Aroa (ASX:ARX) share price has surged 60% since the Polynovo (ASX: PNV) competitor listed on the ASX in July.…

Read more »

asx investor daydreaming about US shares
⏸️ How to Invest

How to buy US shares from Australia right now

If you have been wondering how to buy US shares from Australia to gain exposure from the highly topical market,…

Read more »

⏸️ Investing

Why Fox (NASDAQ:FOX) might hurt News Corp (ASX:NWS) shareholders

News Corporation (ASX: NWS) might be facing some existential threats from its American cousins over the riots on 6 January

Read more »