MSFT - Microsoft

[Guest wellmont]

^I repeat, it is NOT 8B dollars, it is 5.6B, you keep ignoring my point.

 

How do you expect to make a profit if you don't have the userbase? You need to first get people to use your service before you can monetize it.

 

This is internet services, not selling Coca Cola. Internet services usually dont make any money in the beginning.

 

I don't discount the consideration like that.  I go by what the disclosures say. we will probably get a repatriation holiday in 2014. Your mileage may vary. myspace had the users. why did they not "monetize" them. if it was so easy to monetize a large user base, there would be lots more value creation out of web 1.0 and 2.0 companies. the fact is the voice business has changed a lot over the years and these days nobody is going to pay a lot to use voice and video calling. the time to monetize skype may be long gone.

[Palantir]

Again, Skype alone may never be profitable, but it is not a separate business, it's a service that goes into a larger mix and adds to its capabilities.

 

How much would the return be without skype? Nobody knows. How much would it be with Skype? We'll find out soon.

[Guest valueInv]

^I repeat, it is NOT 8B dollars, it is 5.6B, you keep ignoring my point.

 

How do you expect to make a profit if you don't have the userbase? You need to first get people to use your service before you can monetize it.

 

This is internet services, not selling Coca Cola. Internet services usually dont make any money in the beginning.

 

I don't discount the consideration like that.  I go by what the disclosures say. we will probably get a repatriation holiday in 2014. Your mileage may vary. myspace had the users. why did they not "monetize" them. if it was so easy to monetize a large user base, there would be lots more value creation out of web 1.0 and 2.0 companies. the fact is the voice business has changed a lot over the years and these days nobody is going to pay a lot to use voice and video calling. the time to monetize skype may be long gone.

 

Why do you think we'll get a repatriation holiday in 2014?

[Guest wellmont]

a hunch that lobbying efforts will bear fruit. I think they will do it to "spur growth" believing that bigcos will reinvest in American jobs.

[JSArbitrage]

Whats a userbase worth if you cant turn a profit on it.

Why have the userbase, when they can have an app on your platform at no cost to you.

 

I have an Iphone, and an Andriod device - Skype (and Rebtel) are on both. What does MSFT gain by owning this app at the price of $8 billion or $5.6 billion. I would personally have left the money in the bank earning 2% to 4% overseas. I would guess that would generate a higher return than Skype ever would. How has this magical userbase helped MS in Mobile. How did it help Ebay. Paying money just because alot of people use something for little to no money doesnt seem like a great rationale.

 

Also why do you guys feel comfortable saying MSFT can piss away money / earnings because they have alot of it. What kind of argument is that, and the opertunity cost is having $8 billion in Ireland not $5.6. That same money could have been used to buy Nokia tax free.

 

With these arguments why not just buy every hot app for PC and Mobile. They all have growing userbases, and MSFT has alot of money so its a rounding error for them to pay millions or billions for Tinder, Whatsapp, and Snap Chat, ect.

 

Sorry about the sarcasm, but I just cant understand these arguments on a value investing forum. Nokia may or may not work, but $8 billion or $5.6 billion for an App, a feature, or R&D was not rational and will probably end in a write down.

 

Let's be honest here: if Bill Gates didn't start this company and wasn't very respected by Buffett, this conversation would never be happening.  If you were to poll 100 wall street analysts and ask them to name one company that is notorious for crappy acquisitions, I'd be willing to bet MSFT would be in most of their Top 5's. 

 

The MSFT story is a very simple one: a company with a near monopoly in one area is worried that their lack of presence in an emerging part of the industry will erode that monopoly over time.  But a company with management that is used to sitting on their monopoly laurels can't/won't allow their R&D teams to innovate outside of their monopoly paradigm.  So they basically (a) fail at most organic innovation or (b) only pay for relatively mature tech that management with a monopoly mind-set can understand (and thus, usually overpay.) 

 

I think people really underestimate the difficult position MSFT is in from an innovation perspective.  If they were to just shut down all non-Windows/Office projects and return cash to shareholders, they'd almost certainly have a much higher NPV than they do now.  But the leaders of that company know that over time, they'd cease to exist.  This isn't KO where you can serve the same formula for 100 years and keep growing.  So there is a principal/agent problem here. 

 

Apple has an advantage because their brand puts consumers first and can justify a premium price for their ecosystem.  Google has an advantage because their search model allows them to put our decent (but not great) products for cheap or free with no real ecosystem.  MSFT cannot offer free/cheap low-quality products that has no ecosystem and make money. 

 

I was hoping MSFT would pivot more towards the enterprise market and use that as a point of innovation.  I use a Nokia Lumia 920 for work because I like the Outlook integration.  I actually prefer Windows to Apple OSX because I have all the shortcuts memorized from using Windows at work.  But instead, MSFT wants to become more like Apple and less like BBY of old. 

 

Steve Jobs once had a great quote about his turnaround of Apple: "People at Apple thought in order to succeed you have to beat MSFT.  But if Apple winning meant MSFT would have to lose, then Apple was going to lose.  Apple just had to remember who Apple was."

 

I think this is where MSFT is at right now.  They have a choice: come to terms with the fact that MSFT is a company for productivity, professionals, adults, etc. (I am generalizing here) and innovate from there.  Or try to out-Apple Apple and become the cool, hip premium brand that people will pay up for.  If they do that, MSFT is going to lose.  Ballmer was all excited that XBOX put MSFT in 15% of the living rooms in the US and ignored the fact they were already in 95% of the cubicles, c-suites, and offices in the world.  You want people to buy a Lumia? Simply make it indispensable from a work/productivity perspective.  I don't need a Mobile XBOX feature on my phone. 

 

That's my opinion.

 

 

 

 

 

 

[petec]

 

You want people to buy a Lumia? Simply make it indispensable from a work/productivity perspective. 

 

Hallelujah!  Could not agree more.  Although I disagree on the Gates/Buffet connection - I could not care less, I own this for cheap cash flows and because so many people hate it.  We'll see if it works.

 

I also hold the unpopular opinion that MSFT are OK innovators.  They make good products that I love using, as a rule.  They just spend an astonishing amount to do it and are chronically poor at making everyone think the products are cool.  CrApple spends far less and for reasons that are totally beyond me generate irrational excitement among their user base, and hence have extraordinary margins, IMHO.

[Palantir]

CrApple spends far less and for reasons that are totally beyond me generate irrational excitement among their user base, and hence have extraordinary margins, IMHO.

 

*grabs popcorn*

[petec]

CrApple spends far less and for reasons that are totally beyond me generate irrational excitement among their user base, and hence have extraordinary margins, IMHO.

 

*grabs popcorn*

 

Ha - wasn't meant to be an incendiary comment.  More of a backhand compliment!

[texual]

I like the deal. I like the price, I like the hardware arm of MSFT having the best talent in the world. Nokia makes hardware that kicks ass. It comes in at a great time when they have an opportunity to begin producing more products in more categories as well as make award winning design decisions in-house.

 

They can be secretive about their design process and surprise a lot of people with the tight integration of software updates and hardware combined. I like how quickly people got negative on the concept. But this is exactly why I bought NOK shares, so they could sell the hardware side to Microsoft. They'll inject a lot of Nokia talent into Xbox, Surface, watches, every product will have that extra edge.

 

I would be worried if I were any other hardware design competitor. Everyone in the industry knows how great Nokia is at producing hardware. And HTC, Samsung and Apple don't compare.

[Myth465]

^I repeat, it is NOT 8B dollars, it is 5.6B, you keep ignoring my point.

 

How do you expect to make a profit if you don't have the userbase? You need to first get people to use your service before you can monetize it.

This is internet services, not selling Coca Cola. Internet services usually dont make any money in the beginning.

 

You seem to be ignoring everyone's elses argument as it relates to the $8 billion spent. We get your argument, it just doesnt make much sense.

[Myth465]

Whats a userbase worth if you cant turn a profit on it.

Why have the userbase, when they can have an app on your platform at no cost to you.

 

I have an Iphone, and an Andriod device - Skype (and Rebtel) are on both. What does MSFT gain by owning this app at the price of $8 billion or $5.6 billion. I would personally have left the money in the bank earning 2% to 4% overseas. I would guess that would generate a higher return than Skype ever would. How has this magical userbase helped MS in Mobile. How did it help Ebay. Paying money just because alot of people use something for little to no money doesnt seem like a great rationale.

 

Also why do you guys feel comfortable saying MSFT can piss away money / earnings because they have alot of it. What kind of argument is that, and the opertunity cost is having $8 billion in Ireland not $5.6. That same money could have been used to buy Nokia tax free.

 

With these arguments why not just buy every hot app for PC and Mobile. They all have growing userbases, and MSFT has alot of money so its a rounding error for them to pay millions or billions for Tinder, Whatsapp, and Snap Chat, ect.

 

Sorry about the sarcasm, but I just cant understand these arguments on a value investing forum. Nokia may or may not work, but $8 billion or $5.6 billion for an App, a feature, or R&D was not rational and will probably end in a write down.

 

Let's be honest here: if Bill Gates didn't start this company and wasn't very respected by Buffett, this conversation would never be happening.  If you were to poll 100 wall street analysts and ask them to name one company that is notorious for crappy acquisitions, I'd be willing to bet MSFT would be in most of their Top 5's. 

 

The MSFT story is a very simple one: a company with a near monopoly in one area is worried that their lack of presence in an emerging part of the industry will erode that monopoly over time.  But a company with management that is used to sitting on their monopoly laurels can't/won't allow their R&D teams to innovate outside of their monopoly paradigm.  So they basically (a) fail at most organic innovation or (b) only pay for relatively mature tech that management with a monopoly mind-set can understand (and thus, usually overpay.) 

 

I think people really underestimate the difficult position MSFT is in from an innovation perspective.  If they were to just shut down all non-Windows/Office projects and return cash to shareholders, they'd almost certainly have a much higher NPV than they do now.  But the leaders of that company know that over time, they'd cease to exist.  This isn't KO where you can serve the same formula for 100 years and keep growing.  So there is a principal/agent problem here. 

 

Apple has an advantage because their brand puts consumers first and can justify a premium price for their ecosystem.  Google has an advantage because their search model allows them to put our decent (but not great) products for cheap or free with no real ecosystem.  MSFT cannot offer free/cheap low-quality products that has no ecosystem and make money. 

 

I was hoping MSFT would pivot more towards the enterprise market and use that as a point of innovation.  I use a Nokia Lumia 920 for work because I like the Outlook integration.  I actually prefer Windows to Apple OSX because I have all the shortcuts memorized from using Windows at work.  But instead, MSFT wants to become more like Apple and less like BBY of old. 

 

Steve Jobs once had a great quote about his turnaround of Apple: "People at Apple thought in order to succeed you have to beat MSFT.  But if Apple winning meant MSFT would have to lose, then Apple was going to lose.  Apple just had to remember who Apple was."

 

I think this is where MSFT is at right now.  They have a choice: come to terms with the fact that MSFT is a company for productivity, professionals, adults, etc. (I am generalizing here) and innovate from there.  Or try to out-Apple Apple and become the cool, hip premium brand that people will pay up for.  If they do that, MSFT is going to lose.  Ballmer was all excited that XBOX put MSFT in 15% of the living rooms in the US and ignored the fact they were already in 95% of the cubicles, c-suites, and offices in the world.  You want people to buy a Lumia? Simply make it indispensable from a work/productivity perspective.  I don't need a Mobile XBOX feature on my phone. 

 

That's my opinion.

 

Very good post. I agree, they should focus on business, and productivity. SAP isnt trying to be cool or sexy, and isnt spending billions on apps.

Time will tell, I will be watching.

[Guest valueInv]

Whats a userbase worth if you cant turn a profit on it.

Why have the userbase, when they can have an app on your platform at no cost to you.

 

I have an Iphone, and an Andriod device - Skype (and Rebtel) are on both. What does MSFT gain by owning this app at the price of $8 billion or $5.6 billion. I would personally have left the money in the bank earning 2% to 4% overseas. I would guess that would generate a higher return than Skype ever would. How has this magical userbase helped MS in Mobile. How did it help Ebay. Paying money just because alot of people use something for little to no money doesnt seem like a great rationale.

 

Also why do you guys feel comfortable saying MSFT can piss away money / earnings because they have alot of it. What kind of argument is that, and the opertunity cost is having $8 billion in Ireland not $5.6. That same money could have been used to buy Nokia tax free.

 

With these arguments why not just buy every hot app for PC and Mobile. They all have growing userbases, and MSFT has alot of money so its a rounding error for them to pay millions or billions for Tinder, Whatsapp, and Snap Chat, ect.

 

Sorry about the sarcasm, but I just cant understand these arguments on a value investing forum. Nokia may or may not work, but $8 billion or $5.6 billion for an App, a feature, or R&D was not rational and will probably end in a write down.

 

Let's be honest here: if Bill Gates didn't start this company and wasn't very respected by Buffett, this conversation would never be happening.  If you were to poll 100 wall street analysts and ask them to name one company that is notorious for crappy acquisitions, I'd be willing to bet MSFT would be in most of their Top 5's. 

 

The MSFT story is a very simple one: a company with a near monopoly in one area is worried that their lack of presence in an emerging part of the industry will erode that monopoly over time.  But a company with management that is used to sitting on their monopoly laurels can't/won't allow their R&D teams to innovate outside of their monopoly paradigm.  So they basically (a) fail at most organic innovation or (b) only pay for relatively mature tech that management with a monopoly mind-set can understand (and thus, usually overpay.) 

 

I think people really underestimate the difficult position MSFT is in from an innovation perspective.  If they were to just shut down all non-Windows/Office projects and return cash to shareholders, they'd almost certainly have a much higher NPV than they do now.  But the leaders of that company know that over time, they'd cease to exist.  This isn't KO where you can serve the same formula for 100 years and keep growing.  So there is a principal/agent problem here. 

 

Apple has an advantage because their brand puts consumers first and can justify a premium price for their ecosystem.  Google has an advantage because their search model allows them to put our decent (but not great) products for cheap or free with no real ecosystem.  MSFT cannot offer free/cheap low-quality products that has no ecosystem and make money. 

 

I was hoping MSFT would pivot more towards the enterprise market and use that as a point of innovation.  I use a Nokia Lumia 920 for work because I like the Outlook integration.  I actually prefer Windows to Apple OSX because I have all the shortcuts memorized from using Windows at work.  But instead, MSFT wants to become more like Apple and less like BBY of old. 

 

Steve Jobs once had a great quote about his turnaround of Apple: "People at Apple thought in order to succeed you have to beat MSFT.  But if Apple winning meant MSFT would have to lose, then Apple was going to lose.  Apple just had to remember who Apple was."

 

I think this is where MSFT is at right now.  They have a choice: come to terms with the fact that MSFT is a company for productivity, professionals, adults, etc. (I am generalizing here) and innovate from there.  Or try to out-Apple Apple and become the cool, hip premium brand that people will pay up for.  If they do that, MSFT is going to lose.  Ballmer was all excited that XBOX put MSFT in 15% of the living rooms in the US and ignored the fact they were already in 95% of the cubicles, c-suites, and offices in the world.  You want people to buy a Lumia? Simply make it indispensable from a work/productivity perspective.  I don't need a Mobile XBOX feature on my phone. 

 

That's my opinion.

 

Very good post. I agree, they should focus on business, and productivity. SAP isnt trying to be cool or sexy, and isnt spending billions on apps.

Time will tell, I will be watching.

 

+1. Great post. Captures many of MSFt's problems. I would add, however, they have many more challenges than those you've touched on.

[rpadebet]

 

Let's be honest here: if Bill Gates didn't start this company and wasn't very respected by Buffett, this conversation would never be happening.  If you were to poll 100 wall street analysts and ask them to name one company that is notorious for crappy acquisitions, I'd be willing to bet MSFT would be in most of their Top 5's. 

 

The MSFT story is a very simple one: a company with a near monopoly in one area is worried that their lack of presence in an emerging part of the industry will erode that monopoly over time.  But a company with management that is used to sitting on their monopoly laurels can't/won't allow their R&D teams to innovate outside of their monopoly paradigm.  So they basically (a) fail at most organic innovation or (b) only pay for relatively mature tech that management with a monopoly mind-set can understand (and thus, usually overpay.) 

 

I think people really underestimate the difficult position MSFT is in from an innovation perspective.  If they were to just shut down all non-Windows/Office projects and return cash to shareholders, they'd almost certainly have a much higher NPV than they do now.  But the leaders of that company know that over time, they'd cease to exist.  This isn't KO where you can serve the same formula for 100 years and keep growing.  So there is a principal/agent problem here. 

 

Apple has an advantage because their brand puts consumers first and can justify a premium price for their ecosystem.  Google has an advantage because their search model allows them to put our decent (but not great) products for cheap or free with no real ecosystem.  MSFT cannot offer free/cheap low-quality products that has no ecosystem and make money. 

 

I was hoping MSFT would pivot more towards the enterprise market and use that as a point of innovation.  I use a Nokia Lumia 920 for work because I like the Outlook integration.  I actually prefer Windows to Apple OSX because I have all the shortcuts memorized from using Windows at work.  But instead, MSFT wants to become more like Apple and less like BBY of old. 

 

Steve Jobs once had a great quote about his turnaround of Apple: "People at Apple thought in order to succeed you have to beat MSFT.  But if Apple winning meant MSFT would have to lose, then Apple was going to lose.  Apple just had to remember who Apple was."

 

I think this is where MSFT is at right now.  They have a choice: come to terms with the fact that MSFT is a company for productivity, professionals, adults, etc. (I am generalizing here) and innovate from there.  Or try to out-Apple Apple and become the cool, hip premium brand that people will pay up for.  If they do that, MSFT is going to lose.  Ballmer was all excited that XBOX put MSFT in 15% of the living rooms in the US and ignored the fact they were already in 95% of the cubicles, c-suites, and offices in the world.  You want people to buy a Lumia? Simply make it indispensable from a work/productivity perspective.  I don't need a Mobile XBOX feature on my phone. 

 

That's my opinion.

 

 

 

 

+2. I think the problem and solution is obvious to most rational observers. MSFT seems to have mid-life crisis and wants to be the cool uncle instead of the responsible one. One reason for that probably is they  feel, if they are not cool for the young hacker crowd, they might not be able to attract the best software talent out there. But that doesn't excuse them for pissing away billions each year in random acquisitions.

 

That said, I have changed my mind on the "ugliness" of the Nokia deal. Don't get me wrong, I think they are still destroying value, but it isn't as bad as I initially thought it was. Offshore money was anyway being discounted 30%, so a 5B acquisition at 40$ margin per windows mobile device implies 125 mill windows devices to breakeven. They sold about 25mill recently, so even if they don't increase their unit sales, they breakeven on the price paid in about 5 years. Interest on 5B cash is forgone, but if there is  a unit sales increase or if they can sell same number of devices for few more years, shareholders are eventually better off. Are they earning their cost of capital by doing this? Absolutely not. Is the acquired optionality better than sitting on cash? Yes, especially if you assume they could have spent it on something more worthless like Skype.

 

As you can see I have a very very low bar for them to clear.

 

Btw, what else out there do you think MSFT will acquire to be cool?

1. Netflix?

2. Pandora?

3. Twitter?

4. Tesla?

 

[Guest wellmont]

the $40 per phone is gross profit. they were also earning $10 per phone gross profit from Nokia that they will be giving up now that they own nokia. net is $30. they are also probably going to lose their other windows phone customers (samsung htc; 15% of total) who were paying them $10 a phone gross profit.

 

msft own optimistic projections have the business only recouping it's accumulated losses after 3 years on a non gaap basis. that means nokia won't add a dime of value the first 3 years under msft ownership. so not only are they not getting their principal back, they won't even be earning interest the first 3 years. that's if things go according to plan. if they don't, or we have economic problems, they may well lose a lot of money. this is why the market just gave msft a $3 haircut. msft did something only a wall street investment banker would love. they made a projection on where this business, which operates in a rapidly changing industry, is going to be in 5 years. not surprisingly, it's going to be "sitting pretty".

[rpadebet]

the $40 per phone is gross profit. they were also earning $10 per phone gross profit from Nokia that they will be giving up now that they own nokia. net is $30. they are also probably going to lose their other windows phone customers (samsung htc; 15% of total) who were paying them $10 a phone gross profit.

 

msft own optimistic projections have the business only recouping it's accumulated losses after 3 years on a non gaap basis. that means nokia won't add a dime of value the first 3 years under msft ownership. so not only are they not getting their principal back, they won't even be earning interest the first 3 years. that's if things go according to plan. if they don't, or we have economic problems, they may well lose a lot of money. this is why the market just gave msft a $3 haircut. msft did something only a wall street investment banker would love. they made a projection on where this business, which operates in a rapidly changing industry, is going to be in 5 years. not surprisingly, it's going to be "sitting pretty".

 

Good point on lost business and net margin. However do you think losses under pessimistic scenarios for this exceed 25billion? That's what the $3 haircut implies.

[Guest wellmont]

the $40 per phone is gross profit. they were also earning $10 per phone gross profit from Nokia that they will be giving up now that they own nokia. net is $30. they are also probably going to lose their other windows phone customers (samsung htc; 15% of total) who were paying them $10 a phone gross profit.

 

msft own optimistic projections have the business only recouping it's accumulated losses after 3 years on a non gaap basis. that means nokia won't add a dime of value the first 3 years under msft ownership. so not only are they not getting their principal back, they won't even be earning interest the first 3 years. that's if things go according to plan. if they don't, or we have economic problems, they may well lose a lot of money. this is why the market just gave msft a $3 haircut. msft did something only a wall street investment banker would love. they made a projection on where this business, which operates in a rapidly changing industry, is going to be in 5 years. not surprisingly, it's going to be "sitting pretty".

 

Good point on lost business and net margin. However do you think losses under pessimistic scenarios for this exceed 25billion? That's what the $3 haircut implies.

 

no I don't. it's overdone. but it tells you something about what investors thinks of msft capital allocation and strategic positioning. they don't trust them. the market is quite skeptical that this deal is going to work. iow they aren't buyin what msft is sellin in it's PowerPoint deck.

[Guest valueInv]

the $40 per phone is gross profit. they were also earning $10 per phone gross profit from Nokia that they will be giving up now that they own nokia. net is $30. they are also probably going to lose their other windows phone customers (samsung htc; 15% of total) who were paying them $10 a phone gross profit.

 

msft own optimistic projections have the business only recouping it's accumulated losses after 3 years on a non gaap basis. that means nokia won't add a dime of value the first 3 years under msft ownership. so not only are they not getting their principal back, they won't even be earning interest the first 3 years. that's if things go according to plan. if they don't, or we have economic problems, they may well lose a lot of money. this is why the market just gave msft a $3 haircut. msft did something only a wall street investment banker would love. they made a projection on where this business, which operates in a rapidly changing industry, is going to be in 5 years. not surprisingly, it's going to be "sitting pretty".

 

Good point on lost business and net margin. However do you think losses under pessimistic scenarios for this exceed 25billion? That's what the $3 haircut implies.

 

no I don't. it's overdone. but it tells you something about what investors thinks of msft capital allocation and strategic positioning. they don't trust them. the market is quite skeptical that this deal is going to work. iow they aren't buyin what msft is sellin in it's PowerPoint deck.

15% marketshare is a big stretch.

[Palantir]

 

You seem to be ignoring everyone's elses argument as it relates to the $8 billion spent. We get your argument, it just doesnt make much sense.

 

No, you're wrong, there is no evidence that there is going to be a repatriation holiday, especially given the debt the GOTUS is in. 8B would never have been returned to shareholders, and it's incorrect to use that as your basis for any opportunity cost.

[Palantir]

the $40 per phone is gross profit. they were also earning $10 per phone gross profit from Nokia that they will be giving up now that they own nokia. net is $30. they are also probably going to lose their other windows phone customers (samsung htc; 15% of total) who were paying them $10 a phone gross profit.

 

msft own optimistic projections have the business only recouping it's accumulated losses after 3 years on a non gaap basis. that means nokia won't add a dime of value the first 3 years under msft ownership. so not only are they not getting their principal back, they won't even be earning interest the first 3 years. that's if things go according to plan. if they don't, or we have economic problems, they may well lose a lot of money. this is why the market just gave msft a $3 haircut. msft did something only a wall street investment banker would love. they made a projection on where this business, which operates in a rapidly changing industry, is going to be in 5 years. not surprisingly, it's going to be "sitting pretty".

 

Samsung and HTC were losing WP marketshare and showed little interest in investing in the WP platform, so it's not really a loss. While they lose 10/unit in GP, they also have other opportunities for eliminating other costs and redundancies that are part of any acquisitions. They also now have the potential to sell the hardware at cost, and profit off the software, which they would never have before.

 

I think it is very clear that it will take at least a year to really integrate Nokia into MS, and some time after that to fully implement their product strategy, in that sense, 3 years may be too soon to realize a profit. However, I am confident that Microsoft is planning on holding this investment for more than three years, and if executed correctly, will have a lot of spillover into other areas, as Nokia has a great hardware design capability, (I'd love to see Nokia take a crack at that hideous monstrosity known as the Xbox). I dont' think the time taken to recoup the cost is really particularly relevant. What's more important is a) marketshare and b) profit per handset. If they are increasing and positive, respectively, the acquisition should pay off.

 

 

I also don't see why 15% marketshare is a "big stretch" as valueInv casually asserted.

[rpadebet]

For those who think Windows Phone, XBOX, Skype, Surface, Bing, Zune or even Windows itself is remotely important to MSFT valuation and future, please find ValueAct's thesis and full presentation on that below. They assume nothing from any of the above and even assume Windows is going to rapidly decline, yet they find MSFT is a compelling investment. Should help in reducing the frustration about MSFT's capital allocation to some extent. :)

 

http://csinvesting.org/wp-content/uploads/2013/09/MSFT_ValueAct_ltr-Q1_13-MSFT.pdf

 

This has been the crux of my investment thesis too. Always assumed windows, at least in the consumer home space will decline. I just hope it is a steep decline (10%) and not a very steep decline (20%+). If rest of the businesses work out even modestly it is just an extra icing on the cake. These consumer products are just a distraction and publicity nightmare in the grand scheme of things for the company.

 

I am reminded of what WEB said, "Buy businesses which are so good that even an idiot can run it, because sooner or later one will". In MSFT's case shareholders have endured this for 13+ years. Yet the business is intact and also growing. How wonderful is this business which Bill Gates built!

[Palantir]

ValueAct's bull thesis on MS is exactly what I've been saying for ages.

[Guest valueInv]

Interesting:

 

http://venturebeat.com/2013/09/06/nokia-how-about-2-billion-now-microsoft-ok/

[Guest valueInv]

For those who think Windows Phone, XBOX, Skype, Surface, Bing, Zune or even Windows itself is remotely important to MSFT valuation and future, please find ValueAct's thesis and full presentation on that below. They assume nothing from any of the above and even assume Windows is going to rapidly decline, yet they find MSFT is a compelling investment. Should help in reducing the frustration about MSFT's capital allocation to some extent. :)

 

http://csinvesting.org/wp-content/uploads/2013/09/MSFT_ValueAct_ltr-Q1_13-MSFT.pdf

 

This has been the crux of my investment thesis too. Always assumed windows, at least in the consumer home space will decline. I just hope it is a steep decline (10%) and not a very steep decline (20%+). If rest of the businesses work out even modestly it is just an extra icing on the cake. These consumer products are just a distraction and publicity nightmare in the grand scheme of things for the company.

 

I am reminded of what WEB said, "Buy businesses which are so good that even an idiot can run it, because sooner or later one will". In MSFT's case shareholders have endured this for 13+ years. Yet the business is intact and also growing. How wonderful is this business which Bill Gates built!

The deck fails to address any of threats the businesses they are touting. The threat from Box.net to Sharepoint, the threat from NoSQL Dbs to SQL Server, the threat of AWS to their server and other businesses. Most of all, they have glossed over the single most important question: Do any of these products have legs in a non-Windows world? How valuable are their development tools for iOS and Android? Other than one slide that is dubious at best, I don't see them addressing these issues.

 

Further, how much internal strife does the reorg, Ballmer leaving and the Motorola integration? What effect does that have on product delivery and competitiveness?

 

MSFT's business is built on a foundation of Windows; weaken that foundation and you have big questions on whether the building can stand. If they are serious about competing in a non-Windows world, you should see a flurry of announcements stating support for other platforms. I haven't seen much activity in this regard.

 

One more thing, he seems using list prices for Office 365. The street price is heavily discounted. Given that they have more competition in the cloud-based office suite, I would expect heavier discounting for Office 365 than for the desktop suite.

[Guest valueInv]

the $40 per phone is gross profit. they were also earning $10 per phone gross profit from Nokia that they will be giving up now that they own nokia. net is $30. they are also probably going to lose their other windows phone customers (samsung htc; 15% of total) who were paying them $10 a phone gross profit.

 

msft own optimistic projections have the business only recouping it's accumulated losses after 3 years on a non gaap basis. that means nokia won't add a dime of value the first 3 years under msft ownership. so not only are they not getting their principal back, they won't even be earning interest the first 3 years. that's if things go according to plan. if they don't, or we have economic problems, they may well lose a lot of money. this is why the market just gave msft a $3 haircut. msft did something only a wall street investment banker would love. they made a projection on where this business, which operates in a rapidly changing industry, is going to be in 5 years. not surprisingly, it's going to be "sitting pretty".

 

Samsung and HTC were losing WP marketshare and showed little interest in investing in the WP platform, so it's not really a loss. While they lose 10/unit in GP, they also have other opportunities for eliminating other costs and redundancies that are part of any acquisitions. They also now have the potential to sell the hardware at cost, and profit off the software, which they would never have before.

 

I think it is very clear that it will take at least a year to really integrate Nokia into MS, and some time after that to fully implement their product strategy, in that sense, 3 years may be too soon to realize a profit. However, I am confident that Microsoft is planning on holding this investment for more than three years, and if executed correctly, will have a lot of spillover into other areas, as Nokia has a great hardware design capability, (I'd love to see Nokia take a crack at that hideous monstrosity known as the Xbox). I dont' think the time taken to recoup the cost is really particularly relevant. What's more important is a) marketshare and b) profit per handset. If they are increasing and positive, respectively, the acquisition should pay off.

 

 

I also don't see why 15% marketshare is a "big stretch" as valueInv casually asserted.

 

Because it is a quadrupling of marketshare.

[Palantir]

The deck fails to address any of threats the businesses they are touting. The threat from Box.net to Sharepoint, the threat from NoSQL Dbs to SQL Server, the threat of AWS to their server and other businesses.

 

I see, so MS has "threats" to some of their businesses. May as well sell our MSFT shares and short them too just for good measure.  ::)

 

If anything, their nascent PaaS product is the primary threat to AWS.