Windows 8 has generally been positively reviewed on touchscreen devices (Windows Phones and the Surface Tablet). The new breed of Windows Phone devices, such as the Nokia Lumia and HTC 8X are top notch. However, as a desktop operating system, Windows 8 has been mostly panned and the biggest criticisms have been the lack of a start menu and a confusing mix of Modern UI (aka, the interface formerly known as Metro) and traditional Applications. My personal opinion about Windows 8 adoption being slow is that it was to be expected. Many enterprise customers are still just getting used to Windows 7. Nobody wants to switch to a new operating system so quickly, especially one that is more of a radical leap than usual. I have no doubts that eventually Windows 8 or maybe Windows 9 will be a major player across devices, but Microsoft is more than just the desktop.
Looking at the enterprise side, we use SQL Server at work, and with the newest versions from my personal experience, SQL Server is easier to use and manage than Oracle (NASDAQ: ORCL), while matching it in capabilities. Also, Windows is a very capable server Operating System, and Hyper-V seems to be very capable as a virtualization platform compared to VMWare (NYSE: VMW). From a developer standpoint, there is still nothing that beats Visual Studio.
Microsoft’s largest segment, the business division (which is Office and Outlook/Exchange) is doing just fine. There really is no alternative to that combo. The online alternatives to Office such as Google (NASDAQ: GOOG) Docs have some time to go before they can really replace Office/Exchange for the enterprise.
Microsoft’s online division is also gradually reducing losses. The entertainment and devices division still managed to eke out a slight profit in spite of the significant investments Microsoft is making in Windows Mobile devices.
Looking forward, I’d say it will be slower than expected growth for Microsoft on the mobile front. This is based on lower than expected Surface sales and high price of the Surface Pro. Windows Phone sales are a mystery. There is all kinds of conflicting information, with sales ranging from dismal to “strong.” Recently the CEO said the current sales are 4 times sales at launch, but with no real numbers. However, Windows phones are few in number and not so easy to find. Staff at retailers are not familiar with them and there are not enough demo units everywhere for customers to try them. That will change with time, and as Windows 8 propagates and people become more familiar with the Metro interface. Also, Nokia just got a head start on China’s largest carrier against the iPhone5. Windows Phone/RT will be like the XBox, and Microsoft will keep at it until eventually it turns a profit. The Xbox itself is doing spectacularly well, partly thanks to the Kinect.
As for Windows 8 adoption, it will improve as people see the new Ultrabooks. I know I was impressed when I saw the Ideapad Yoga, as were fellow geeks. The flexibility of Ultrabooks is something that Apple (NASDAQ: AAPL) doesn’t have yet.
On the Enterprise front, I believe Microsoft will gain market share. As an Enterprise Application Engineer, I know it is very difficult to switch out Enterprise Systems at any decently sized company, but Microsoft does offer a value proposition. It is not that hard, however, to switch from VMWare to Hyper-V. Also, new deployments might show a propensity to buy the most value for money system.
Microsoft’s online offerings are steadily improving. Maps, Skydrive (which I use regularly), Office 365, Bing, Outlook.com, etc. are all at a point where they are good enough in comparison to the competition.
So all this being said, where do I think the stock is heading? I like the 3.5% yield and I think long term the future is not as dim as analysts indicate. I might open a small position in Microsoft if the stock hits it’s 52 week low of around $25. As such, I see it as a slow growth but good dividend stock. Even though Microsoft’s income has risen, the stock has done nothing for 10 years:
I expect Microsoft to reach $35 in the near future (next three years), with a slow increase in income and consistent dividend growth.
Disclosure: Long AAPL, GOOG, NOK