MSFT

[Liberty]

That certainly seems to hint at cannibalization. Overall, total searches should be up, but just because a user now has  two devices - a laptop and a smartphone doesn't mean they are performing twice as many searches.

 

The number of questions you want answered in a day and the number of searches you do are two very different numbers. The more convenient it becomes to search, the more the number of searches will approach the number of questions you want answered -- people might not want to go to their computer or open up their laptop everytime they'd like a search, but it might be easy enough to check on a phone (especially with voice search). The search pattern that google showed was the one that they've been seeing for years (makes sense, no: When people aren't at their desk, they use internet search less). But now mobile is being added into the dips of when people aren't at their desks (some mobile searches will replace desktop ones, but many will be searches that wouldn't have happened otherwise).

 

I see it all the time. Group of friends talking, a question is asked, people whip out their phone to search google.

 

My point is that Google (like other companies) releases stats that paint them in a good light, like the number of Android activations.

The numbers to watch are the financials. They'll tell you everything. Despite 500K activations a day ( a number far higher than the iPhone), they are growing at almost the third the rate of Apple.

 

Apple is definitely the dominant player there and monetizes hardware and apps much better than anyone else, no question. But I believe Google is in this for the long haul and they are positioning themselves in a way that nobody would have foreseen a few years ago (I mean, Google making OSes? for phones?), and it's going to help them a lot in their core ad business, which is very profitable.

 

Those app revenues are very telling. Google does not take a cut but rather pays the operator. They also give them a cut of the search revenues. On the other hand, Apple actually takes a cut of the subscription revenues from the operator. Sounds like Google is buying market share. It would not be surprising that published metrics like activations or numbers of searches grow much faster than actual revenues or profits.

 

Of course they are going for marketshare. They said it themselves. Do you see any other strategy out there competing with Apple? They wouldn't have that many hardware partners and software developers if they weren't running an open platform with very good terms compared to Apple. But now the product is rapidly getting better, the hardware is getting better, and the apps are getting better, and they've pretty much ensured that mobile devices will use open standards (HTML5, etc) and that they're not taken hostage by competitors that control the platform between them and their customers (directly and indirectly -- now that Android offers the open web, it's harder for others to lock things down too much).

 

It's a tradeoff; they could have tried to maximize direct revenue per phone, but that could have meant a much smaller marketshare and influence because of fewer partners, slower development, less ad dollars spent by partners, fewer developers, and over time much smaller revenues. They did it the smart way, IMHO.

 

What matters is where they'll be in 3-5 years, not next quarter. And right now the landgrab for mobile has two winners: Apple and Google. Controlling a platform is extremely valuable. It could easily have been Apple and then everybody else far behind...

[Liberty]

My point was that the handset maker makes no money from app sales.

 

That's correct. It's the part about Google that wasn't.

 

Agreed that research firm can be wrong. But that is the only datapoint I have seen so far. Have you come across anything that says the numbers are wrong?

 

There are three reasons why those numbers are atleast on the right track:

- Google (unlike Apple) is not boasting about how much they paid out to developers. Don't you think if they were paying a lot, they would make loud public statements to convince developers that there is money to be made in the Android market? Clearly, Google makes no money out of it, so they don't have to keep it a secret.

- Apple tends to get higher end customers that also spend more on apps and other mobile services.

- Probably the biggest reason:

 

http://www.androidcentral.com/over-50-android-market-apps-are-free

 

I don't dispute that compared to Apple, they're far behind. But they're not trying to out-Apple Apple. And I'm not a short-term kind of guy, and I think they're on a great trajectory. I'm on a lot of forums and sites where programmers are, and Android is definitely getting more attractive to them and more talked about. Will the average Android user ever spend as much as the average Apple user for apps? No, because Android will go downmarket as well as up. But will the sheer number of users be enough to make the store attractive and for most of the best quality apps that people actually use to be ported there? Sure.

 

It's late and I need to get to bed, but tomorrow I'll try to find some time to write more about how I see each company's strategic position.

[Liberty]

All right, after a (too short) night of sleep, here's the outline of how I see this for GOOG:

 

How does Google prefer to make money? Where have they the highest margins and biggest moat?

 

-Search ads are extremely profitable because

 

1) They are targeted. You know the intention of the user because they just searched for "stainless steel fridge" so if you show them ads for stainless fridges, you'll get a lot more value than if you show fridge ads on facebook where people's intention is mostly to check up on their friends. That's why some keywords are worth many dollars per click while less targeted ads are often worth fractions of pennies.

 

2) Ads shown on the Adsense and Doubleclick networks are also profitable, but google has to share money raised in the auction with the publishers. Ads on Google's own sites don't share any of the money. Another reason search is preferable for them.

 

-So how does Android fit into all this?

 

1) In 2007 when the Google guys saw the iPhone and realized that in the future a lot more of the web was going to be consumed on mobile devices, and that they had to make sure their products were well positioned for that and that those who controlled that mobile platform couldn't harm them, they could have said: "all right, we're going into the phone business and we'll compete directly with Apple" and maybe a year later they could have had a phone like the Nexus One. They could have tried to make money from the hardware and the apps, but the problem would've been:

 

2) They're a software company. They don't have tons of industrial designers, they don't have a large distribution network and retail outlets, they don't have supplier relationships, etc. So they could have tried to turn the ship around and become a whole other kind of company to compete with Apple, but the problem is, chances of success would be low, and if they became a phone maker they wouldn't just be competing with Apple, they'd also be competing against RIM, Samsung, Motorola, HTC, etc.

 

3) Maybe they could have licensed their OS to some of these companies, but when you want to make money from the hardware, you don't want to give your secret sauce to everybody. That's why Apple will never license iOS. But maybe GOOG could have skipped the phone and just tried to license a phone OS. Maybe that could have worked, though phone makers up to that point hadn't shown too much interest in licensing other people's OSes. And if you sell it to them, you can't price it too high or they'll go in-house, and you always have to worry that someone else will try to undercut you with a cheaper OS (windows for phones, etc) and that your phonemakers will jump ship, etc.

 

4) I think Google looked at that kind of business and they decided they'd rather go for maximum scale instead. When you give a quality OS for free, you know you'll get the maximum number of partners possible because you can't be undercut on price and they won't feel you are competing with them, they're partners and if they do well, you do well. I'm sure Google decided that what was most valuable was to have hundreds of millions of devices with a button on the front that took you to search and/or a prominent search bar on the home screen. The only thing more valuable than a search ad is a geo-targeted search ad... and this way they have a lot of influence over how the mobile platform develops and what users expect from phones. Otherwise we might have gotten phones that go "oops, sorry, Microsoft paid us so this phone can only search the web with Bing!" or "sorry, web apps don't work on this phone, only paid downloaded apps work" or whatever BS like that. And trust me, more of that stuff would be plausible if Google was a phonemaker and other phonemakers felt directly in competition with them.

 

5) So I say without hesitation that Apple is the king of smartphones and tablets. But Android is a solid #2 that might not have happened if Google had taken another strategy, and while I think Apple is a better business right now, I agree with Buffett and Munger that Google has a great moat, and I think that their 'infrastructure' play is stable over the long term. Apple is kind of on a product treadmill, and they need to keep producing great products that people want (they also have some nice infrastructure stuff like iTunes and the App Store, but it's a much smaller part of their business). Meanwhile, Google benefits (via search, adsense or display ads) from every Android, iPhone, RIM, Nokia, Windows phone, iPad, etc...

 

So I wouldn't have any problems investing in AAPL, and I think those here who invested in MSFT probably will also do well over the long term, but GOOG at $482 fit my personal criteria better, so I got in.

 

I'm going to cross-post this in the Google thread because this doesn't have much to do with MSFT anymore. Feel free to continue the discussion over there:

 

http://cornerofberkshireandfairfax.ca/forum/index.php?topic=4442.120

 

Update: I also forgot to mention that if Google hadn't made Android free, chances are they couldn't have used the Linux foundation because of the GPL license (though I'm not 100% sure, maybe there's a workaround), so it would have been a lot more work to build the OS from scratch rather than on top of an existing foundation.

[Guest valueInv]

Bing seems to be slowly creeping up on Google:

 

http://techcrunch.com/2011/07/13/binghoo-gains-search-share/

[ERICOPOLY]

Our systems have me short MSFT. It will be interesting to see how this plays out. I think I have only a 60% chance of making money off this short.

 

As Paul Tudor Jones once said, "The obvious trade is obviously wrong."

 

I must be the only guy on this thread to make any money so far on MSFT  ;D

 

It could always go the other way, we'll see what happens. This seems like it might turn into one of those divergent problems in which the structure of the problem itself almost guarantees that most people will not be able to solve it correctly. As a friend of mine once pointed out, that's why certain problems, such as education, are very hard for democracies to solve, they are divergent problems by their very nature.

 

Are you now the only one on the thread to be losing in MSFT?  Just kidding. 

[Liberty]

Looks like MSFT is working on its own social thingy,and they accidentally published part of it to the web (for real, check out: http://www.socl.com/ ).

 

http://venturebeat.com/2011/07/14/microsoft-social-project-tulalip/

 

We'll see if anything ever comes out of it or if it's another Microsoft Research thing that never ships.

[Liberty]

MSFT apparently dropping out of Hulu bidding:

 

http://www.bloomberg.com/news/2011-07-19/microsoft-is-said-to-drop-out-of-auction-for-hulu-online-streaming-service.html

[tombgrt]

http://www.microsoft.com/investor/EarningsAndFinancials/Earnings/PressReleaseAndWebcast/FY11/Q4/default.aspx

 

nice beat as expected. Stock up only 2,5%.

[Parsad]

Any other company and that would have been a terrific quarter.  But because it's Microsoft, and you are competing against Google and Apple, it looks mediocre. 

 

They are spending money and playing catch-up in the cloud and search...they still dominate home and business users...X-box and Kinect have hold of a certain segment of the market and look to dominate...Windows 8 with mobile platform should be out next year. 

 

Regardless, they are still making money hand over fist, and based on their earnings power, the stock is still very cheap.  Should be around $35 plus.  They should be buying back all the shares they can under $30!  Cheers! 

[Liberty]

http://www.microsoft.com/investor/EarningsAndFinancials/Earnings/PressReleaseAndWebcast/FY11/Q4/default.aspx

 

nice beat as expected. Stock up only 2,5%.

 

Good numbers. Stock down -0.79 right now though.

[shalab]

MSFT is down because of windows. Windows is the engine for microsoft - slow down in windows is the harbinger of slower growth elsewhere in due course.

[tombgrt]

Any other company and that would have been a terrific quarter.  But because it's Microsoft, and you are competing against Google and Apple, it looks mediocre. 

 

They are spending money and playing catch-up in the cloud and search...they still dominate home and business users...X-box and Kinect have hold of a certain segment of the market and look to dominate...Windows 8 with mobile platform should be out next year. 

 

Regardless, they are still making money hand over fist, and based on their earnings power, the stock is still very cheap.  Should be around $35 plus.  They should be buying back all the shares they can under $30!  Cheers! 

 

Exactly. They bought back over 5% of their shares in fiscal 2011. At current valuation + share buybacks all internal growth occuring is just extra sauce. Total cash, equivalents and st investments are almost $53b from $37b in 2010, I would like to see even higher share buybacks.

 

I bet the market hates this :

 

Windows and Windows Live Division revenue declined 1% for the fourth quarter and revenue for the full year decreased 2%. Excluding the impact of the prior year Windows 7 launch and revenue deferral, we estimate full-year revenue growth was in line with PC market growth of 2% to 4%. Windows 7 has sold over 400 million licenses and business deployments continue to accelerate.

 

It's the same with Intel and it's stock that went down today after earnings.

Even if the windows division is in irreversible decline, there are plenty of opportunities left to make up for it.

[tengen]

They are spending money and playing catch-up in the cloud and search...they still dominate home and business users...X-box and Kinect have hold of a certain segment of the market and look to dominate...Windows 8 with mobile platform should be out next year. 

 

I'm not sure MSFT is dominating the home market. According to my sports club's web site, 40% of weekend visitors are using Macs/iPhones/iPads (vs 25% during the week). That's up from about 5% three years ago. The sample size is a few hundred visitors (in one weekend).

[goldfinger]

http://www.microsoft.com/investor/EarningsAndFinancials/Earnings/PressReleaseAndWebcast/FY11/Q4/default.aspx

 

nice beat as expected. Stock up only 2,5%.

 

Good numbers. Stock down -0.79 right now though.

 

After hour trading is very light. Not sure it is representative of anything really!

[Liberty]

http://www.nytimes.com/2011/07/25/business/bing-becomes-a-costly-distraction-for-microsoft-breakingviews.html?_r=1&src=rechp

 

Haven't read it all yet, so not agreeing or disagreeing with it. Just posting because I figure others might be interested.

[hyten1]

to be very blunt and honest, nytimes has really nothing to write about

 

their assumptions is someone else can monetize bing better, i haven't seen a compelling argument that anyone else can (beside google)

[Liberty]

to be very blunt and honest, nytimes has really nothing to write about

 

their assumptions is someone else can monetize bing better, i haven't seen a compelling argument that anyone else can (beside google)

 

Yeah, now that I've read it, it doesn't make sense. Doesn't make sense for MSFT, and doesn't make sense for others to buy.

 

I mean, Microsoft has made Bing the default search engine in the most popular (still) browser in the world (IE) and got all the traffic that Yahoo has been building over a decade (a falling share, but still high), and for a while they were paying people with gift cards for using their product, and they're losing a few billions. Not sure how anyone else can push Bing much harder than this... And it's not like Bing is brand new and just needs time to grow. Sure they rebranded it a few years ago, but MSFT Live Search was basically the same technology as Bing and they've been at it since 2006 (and since 1998 before that with MSN Search). It's not like MSFT hasn't been trying with search for a while...

 

Interesting fact: "Counting core searches only, i.e. those where the user has an intent to interact with the search result, Bing achieved a market share of 14.54% in the second quarter of 2011 in the US."  

 

http://www.businessinsider.com/chart-of-the-day-us-search-market-share-2011-7?op=1

 

http://www.comscore.com/layout/set/popup/Press_Events/Press_Releases/2011/7/comScore_Releases_June_2011_U.S._Search_Engine_Rankings

[vinod1]

Klarman takes a big position in MSFT.

 

http://www.dataroma.com/m/holdings.php?m=BAUPOST

 

Vinod

[Carvel46]

Thanks Vinod. That's cool!

If my calculations are right...

12,000,000 shares x $25 = $300 million position

If his AUM is $20 BILLION (largely bonds), then $300/20,000 is a 1.5% position.

It's a large % of the equity side, but not a large % of the total portfolio.

[JSArbitrage]

I think that's normal for Klarman.  He is a very diversified investor; in fact, he said he'd only go up to 10% of AUM on an equity if he had control. 

[benchmark]

I bought some Jan 13 20 call last week, so far it's down :(

[enoch01]

Microsoft has gotten some press lately, since Einhorn and Klarman have filed their holdings.  If it isn't a fat pitch right now, I don't know what is.  For perspective, I think it's worthwhile to revisit Viking's post that kicked off this thread.  From a mere 15 months ago:

 

I established an initial position in MSFT today. I think it has become a very boring stock...

Price = $26.00

2010 Earnings = $2.05 to $2.10 (lets say $2.07); PE = 12.5

2011 Earnings = $2.20 (could easily come in higher should the economy continue to stabilize)

Dividend = $0.52 = 2%

Cash on hand = $5.00 per share; No debt to speak of. With earnings buying back meaningful amounts of shares and I would expect the dividend to continue to increase.

Can$ = $0.95 (relatively high, which is important for a Canadian investor)

Shares were trading at $31.38 in April; down almost 18% in a month.

 

 

As of today's close, the price is virtually unchanged, down a hair.  TTM EPS is $2.69, an increase of 31%.  P/E just under 10.  Net cash per share is basically unchanged.  Margins are holding.

 

Here's Value Line's current report:  http://www3.valueline.com/dow30/f5905.pdf

 

Will they increase TTM EPS another 30% 15 months from now?  If they do, where will the price be?  If it remains unchanged, that will be a P/E of 7.4.

 

Either the company is winding down (they don't appear to be), or they are about to execute a huge, horrendous, value-destroying acquisition (certainly a risk), or Mr. Market is off his rocker.  Any other guesses?

 

I'm long, of course.

[zarley]

Will they increase TTM EPS another 30% 15 months from now?  If they do, where will the price be?  If it remains unchanged, that will be a P/E of 7.4.

 

Either the company is winding down (they don't appear to be), or they are about to execute a huge, horrendous, value-destroying acquisition (certainly a risk), or Mr. Market is off his rocker.  Any other guesses?

 

Bump the dividend, increase buy-backs, and a special dividend like in 2005 (particularly if a tax holiday on foreign cash is enacted).  After the near-miss with Yahoo!, you can't entirely discount a value-destroying acquisition. 

 

With all the big name value guys who have been buying, the question I have is: who is selling at $25? 

 

 

[gfp]

 

With all the big name value guys who have been buying, the question I have is: who is selling at $25? 

 

 

Well we know one guy:

http://www.sec.gov/Archives/edgar/data/789019/000122520811014766/xslF345X03/doc4.xml

[zarley]

 

With all the big name value guys who have been buying, the question I have is: who is selling at $25? 

 

 

Well we know one guy:

http://www.sec.gov/Archives/edgar/data/789019/000122520811014766/xslF345X03/doc4.xml

 

Heh, good point.  But, even 5 million shares is a pretty small fraction of just the known purchases from guys like Klarman and Einhorn and Dodge&Cox, etc.