MSFT - Microsoft

[Guest wellmont]

A lot of these misses happened under Bill Gates, but he always escapes blame. Everybody knows that Ballmer became CEO in 2000, however he is not a product guy, Bill Gates continued to have authority over product for many many years after stepping down from CEO. Things like phones, tablets, web Microsoft had for many years before Apple. Steve Jobs himself recounts where he got the idea for the iPad - from a Microsoftengineer at a barbecue who was working on something similar (Bill Gates was very proud of this project). Under Bill Gates, the management philosophy was all about making Windows central, and anything that didn't prioritize Windows got the axe (For example, how Brad Silverberg was shut down after he proposed doing web-based software 12-13 years ago, today we think that is going to kill MSFT, but they looked at it over a decade ago), and they killed tons of promising projects. Furthermore, Bill Gates had absolutely no clue how to monetize the Web. No getting around that.

 

Ballmer has been undoing these mistakes and has been transforming this company ridiculously. People talk about phones and tablets and yadda yadda, but nobody talks about how dominant MSFT is in the enterprise software market, how S&T has been seeing excellent growth (iCloud runs on Azure btw), or the remarkable design shift that has happened in the company's products. Could you imagine Metro interface under Gates? LOL

 

If it wasn't apparent, I'm pro-Ballmer.

 

his 3 biggest deals, 2 that he was allowed to do and 1 that he wasn't, have destroyed value. He had to write off the entire value of the Aquantive deal, which was over $5b. I expect that he will have to write off much of skype. And we all know that at the price he offered for Yhoo, it would have been a bad deal for msft.  He is good operator. I think he would be a great COO somewhere. But capital allocation isn't his thing. And products aren't his thing.

[Palantir]

All you're focusing on is acquisitions, which in many cases have been poor, but he's not paid to do capital allocation, he's paid to keep this business afloat and grow it. Bad acquisitions happen from time to time and are part of this business. I can't think of any other way the manager of a giant corporation dependent upon one or two products can shift their business while keeping their current customers happy and staying extremely profitable.

 

 

"Just return cash to shareholders" is not always the answer, this isn't your average low tech bank or food company, spending tons of money on random projects in the hope they pay off may be necessary.

[rukawa]

I think Ballmer is not a horrible CEO. You could do much much worse. That said he is not a great CEO either and definitely not a shareholder friendly CEO. Einhorn doesn't know anything about tech but he understands capital allocation. Microsoft should have bought back a lot more shares than it has and spent much less on stupid acquisitions.

 

Microsoft is a fantastic business run by a not horrible CEO.

 

My usual analogy is to Rome. Rome regularly lost battles but usually won wars. Typically it would face an enemy and lose, lose again, lose again, lose again and then finally start winning. It would almost always win the war. This was because they basically had a steady supply of people and money from surrounding Italian states that were mostly loyal to them. Thus Hannibal, the Carthiginian general, came into Rome and crushed the Roman armies in 3 battles. Then he spent months trying to rouse surrounding Italian states to his cause mostly without luck. Meanwhile Scipio Africanus created a new type of Roman army designed to defeat Hannibal and spent sometime training them. He essentialy copied many of Hannibals innovations. In the end Scipio Africanus succeeded in defeating Hannibal. Rome eventually destroyed Carthage.

 

Microsoft is like Rome. They have a huge moat around their enterprise business and this provides them with a steady supply of cash which will not be going away for a long time. They can be defeated, defeated and defeated again and again and again. But eventually they learn and because they have tonnes of cash they can afford to do this. In the end they often win. Microsoft Office is a case in point.

 

Whether this is ultimately good for shareholders is another question.

[Palantir]

Keep in mind, Ballmer had a critical role in building this "great business". Just out of curiosity, who else has done successfully what Ballmer is trying to do? It's easy to mock the guy, but I'd definitely like to see some examples of successful strategy shifts while keeping your current customers and staying extremely profitable. If they just pay out cash to shareholders, they'd be in no better shape right now from a strategic point of view, and that's what matters, so no David Einhorn has no clue, because he's not thinking about the long term health of the company, he's in there to make a nice return over the short term, and exit.

 

 

On a sidenote, according to Mitt Romney's book, he tried to hire Steve Ballmer to Bain, but he's like...."No....I've decided to join my friend's startup, called Micro-Soft".  ;D

 

EDIT: I like the Rome analogy though.

[Guest wellmont]

gates and allen built the business. ballmer helped operate it. and i agree that if he had spent more money on buying back stock and paying dividends the stock would be higher. his acquisition record is abysmal. Ballmer has had the luxury of one of the best businesses on the planet throwing off free cash flow. what has he done with it? Bing? Vista? windows mobile? kin? surface? advertising? his internet business has produced huge losses for over ten years running. xbox has not been a very profitable business for msft.

[Palantir]

Allen left the company in the early 80s, he did not build MS, Ballmer had a much bigger role in MS than Allen. You haven't followed the company much, have you?

 

- It's not true that the stock would be higher, these tech firms are priced on future expectations, not how much cash they return to shareholders - furthermore, they've returned a lot of cash, you just choose to ignore that. As I've stated, "just return cash" is not the answer to everything, especially in technology. I'd like for them to pay more divs (like Apple), but it's not a huge negative.

 

- His acquisition record is irrelevant. He has the latitude to take risks, even if they don't pay off.

 

- Bing has seen a lot of growth since inception, you choose to ignore that.

 

- Mobile platform was created under Bill Gates....you choose to ignore that. If anything, Ballmer has invested much more in mobile than Gates ever did, and we're seeing growth.

 

- Internet was terrible under Gates too, but Ballmer again, has invested much more.....you choose to ignore that.

 

- Xbox is still an emerging product. Hey ValueInv, when's Apple's TV coming?  ;D

 

Frankly, it seems that you're only focused on the short term. If you are not a long term investor, are not willing to take losses to make future gains, and you simply do not have the patience to wait, then MS is not for you. This is not a net-net you can just milk cash out of and leave.

[Guest wellmont]

no it's not for me. :)

[blainehodder]

- His acquisition record is irrelevant. He has the latitude to take risks, even if they don't pay off.

 

I take issue with this point.  While MSFT may be a good investment in spite of poor capital allocation, I'm not sure how you can say that the Ballmer's terrible M&A record is irrelevant to the investment.  Sure it isn't the only factor.  Capital allocation is never the only factor, but is important for any investment...and MSFT's cap allocation under Ballmer is poor.  That is as a definite negative on the company.  Simple as that.

 

A company can earn great money, but if it flushes the money down the drain on wasteful capital allocation, the fact that they made it in the first place is what is irrelelavant.  Money above and beyond maintenance capex should either a) be paid out, b) buyback shares, c) go to high return projects, and that choice should come down to expected returns.

 

 

I still like the company though.  I live in MSFT Office, and Xbox is awesome.  Servers make for decent business as well.  I think most of those are strong businesses with great returns on capital, and strong moats. I'm not sure Bing, Phones, Surface, or Skype will ever really be great capital outlays... Bing, Phones and Surface may have been okay risks to take giving him latitude.  Skype, Yahoo, and Aquantive seem particularly moronic.  Perhaps it could be argued Skype is maintenance capex for cementing the moat of office.  For the price, I think it is outrageous regardless.

 

Anyhow, I expect the the company should be able to deliver double digit returns, but only if stupidity is kept to a minimum.  You wont make anything if Ballmer spends 17 Billion on Pinstagrumblrype.

 

Pretty typical decent moat, weak capital allocation, strong returns on capital, fair price company that should continue to chug along.  Discounting expected returns for capital allocation is reasonable.

[Guest valueInv]

New MSN?

 

http://techcrunch.com/2013/06/03/microsoft-satiates-developers-ever-loving-appetite-for-lower-pricing-with-per-minute-billing-on-windows-azure

[Guest valueInv]

Cut, cut, cut:

 

http://www.bloomberg.com/news/2013-06-03/microsoft-said-to-cut-windows-for-tablet-prices.html

[Guest valueInv]

Looks like they want to give up their XBox franchise also:

 

http://pandodaily.com/2013/06/12/from-jester-to-savior-how-the-xbox-one-turned-the-playstation-4-into-the-white-knight-of-console-gaming/

[tombgrt]

Xbox One presented at E3 conference earlier this week.

 

This is how it is doing compared to Sony's PS4 on an amazon poll:

 

I know this is a really small part of MSFT's business but this tells something about MSFT and their ability to listen to what the customers want.

 

Edit: Oops, I missed ValueInv's post!

[Palantir]

Don Mattrick steps down to take over Zynga. Somewhat surprising, as he was supposedly primed for a larger role at MS. I suppose this makes Satya Nadella the most powerful executive after the SteveB.

 

 

http://money.msn.com/business-news/article.aspx?feed=AP&data-ipsquote-timestamp=20130701&id=16658296&ocid=ansmony11

[VAL9000]

It's nice to see some creative thinking on Bing:

http://www.theverge.com/2013/7/1/4482492/bing-as-a-platform-build-2013-ios-7-windows-8-1

 

I think iOS/Win8.1 and Bing are a natural fit.  Microsoft and Apple are both in the "rich client meets web services" camp of computing, whereas Google is in the "web for everything" camp.  Overall this is good for both Microsoft and Apple.  Potential upside for Microsoft's search investment, potential upside for Apple's Siri capability.  Plus a partnership in place of a rival is always a good thing.

 

[Palantir]

Microsoft is betting that consumers will start to use search in different ways, moving away from web-based search engines and toward the expectation that data will be available within applications or services instantly.

 

 

This.

[Guest wellmont]

Microsoft is betting that consumers will start to use search in different ways, moving away from web-based search engines and toward the expectation that data will be available within applications or services instantly.

 

 

This.

 

will THIS be enough to turn decades of losses into profit?

[Guest valueInv]

It's nice to see some creative thinking on Bing:

http://www.theverge.com/2013/7/1/4482492/bing-as-a-platform-build-2013-ios-7-windows-8-1

 

I think iOS/Win8.1 and Bing are a natural fit.  Microsoft and Apple are both in the "rich client meets web services" camp of computing, whereas Google is in the "web for everything" camp.  Overall this is good for both Microsoft and Apple.  Potential upside for Microsoft's search investment, potential upside for Apple's Siri capability.  Plus a partnership in place of a rival is always a good thing.

 

Bing is doing a lot of interesting things and they are beginning to pull ahead in some areas:

 

http://pandodaily.com/2013/07/01/microsoft-is-emerging-as-the-social-search-leader-and-google-should-be-worried/

 

DuckduckGo is helping too:

 

http://searchenginewatch.com/article/2275867/DuckDuckGo-Sees-Record-Traffic-After-NSA-PRISM-Scandal

[hyten1]

for those interested

 

http://designtaxi.com/news/358985/Skype-s-Heart-Warming-New-Ad-Campaign-Brings-Families-Together/

[Hershey]

MSFT's realignment sounds a lot like IBM's Smart Planet strategy.  At first blush, I would think that IBM would have a better chance of executing the strategy than MSFT.  (Note:  MSFT is largest equity holding.)

[blainehodder]

http://www.microsoft.com/en-us/news/Press/2013/Jul13/07-11OneMicrosoft.aspx

 

"The frontier of high-value scenarios we enable will march outward, but we have strengths and proven capabilities on which we will draw."

 

-Ballmer

[Palantir]

I should have bought more of this stock when it was at 26.

 

 

Moral of story: Buy more when cheap. If you are worried, grow a pair.

[Guest wellmont]

MSFT's realignment sounds a lot like IBM's Smart Planet strategy.  At first blush, I would think that IBM would have a better chance of executing the strategy than MSFT.  (Note:  MSFT is largest equity holding.)

 

no change in people. just titles. :)

[Palantir]

^What did you buy MSFT at? Just trying to get a sense of your bearishness.

[Guest wellmont]

^What did you buy MSFT at? Just trying to get a sense of your bearishness.

 

I don't own. I've made money in it before. My dad loves it and owns it. he thinks they can do no wrong. :)

[LC]

Sold today at about 35 and change...hit my 30% after friction (commissions) target. I love the business of office and their server stuff, but I think I can either re-enter at either a better price or find better bargains in the future. Held it in an IRA so no tax consequences factored into the situation.