Why Not All Earnings Are Equal; Microsoft Has the Wal-Mart Disease

The problem with this article is that it is based on an incorrect thesis, which is that MS revenue has stalled. It hasn't. See:<p><a href="http://ycharts.com/companies/MSFT/revenues_ttm#zoom=5" rel="nofollow">http://ycharts.com/companies/MSFT/revenues_ttm#zoom=5</a><p>MS revenue has continued to climb to this very day, with only a drop during the recession. Outside of Apple, there aren't many companies that wouldn't take this type of revenue growth at this size.<p>The article makes a mistake a lot in the tech sector make which is that if MS isn't doing better than Apple then its in serious trouble. Doing worse than Apple is hardly an insult. There are probably no more than a couple of companies in the world that are doing better than Apple. Yet, there are few F500 companies that can match MS's revenue/profit growth -- yet almost all can beat its market cap growth.

I like Microsoft, but as a disclaimer before my analysis - I bought 400 shares of Microsoft stock a little bit ago at $25.79 per share.<p>Here my thoughts:<p>-Microsoft's price/earnings ratio is around 10, which I feel is pretty good for a company with a lot of stable revenue base and a chance at upside.<p>-This article talks about Microsoft's poor performance in tablets, which is true and worrying. I'm not sure Microsoft will make that ground up. They do have an excellent research division, though, and I'm wondering if they can make a strong showing in the next generation of technology after this. I don't know what that'll be, but new input devices should be coming online. The Kinect is <i>amazing</i>, I was really blown away playing with one in Singapore. If Microsoft can build on that to do alternative input and the next generation, they could have a huge renaissance.<p>-They have a very solid installed base. Government and business are very likely to keep running on Windows and Office. For consumers, even if tablets totally take over - and I'm not sure that'll happen - late adoptors will be buying those pre-installed Windows laptops and PCs just like always.<p>-$50 billion in cash reserves means they've got a lot of time to figure something out going forwards. Lots of cash + some very stable covering their fixed costs + big research division = seemingly a pretty safe buy with some upside.<p>I don't think it's a good stock to buy for short term appreciation - it might well go down over the next 2-3 years. But I'm comfortable holding it for 10 years. I think there's a decent shot it pays well in dividends and holds its value and a decent shot for lots of growth and appreciation.<p>Of course, maybe the house does fall over. Do your own research, etc, etc, etc.

The world is addicted to exponential curves, and yet everywhere we look, we see logistic curves in a finite world. Unfortunately, it is quite profitable to con people into thinking that the latter is really the former. Our whole financial system is built on this fraud, from the VCs on down.<p>Microsoft ran up the logistic curve, stalled out and, sure, made some bad decisions.<p>Apple made some bad decisions, went way down the logistic curve, and now is climbing back up it.<p>That isn't to say there aren't lessons to be learned by looking at the two companies. It is to say that one of the premises of the article, that there is some exponential growth curve that all companies need to stay on, is flawed. I would expect no less from one of the chief financial ponzi rah-rah mags, though.

Customers don't need to be excited about your products to make a boatload of money.<p>I don't think anyone is excited to buy gas at $4 a gallon, but that doesn't make it an unprofitable business to be in. MS has been running with out it's founder for years and has been moderately successful.<p>If one is to believe the reality distortion field that Jobs is central to Apple's success then his health problems pose a major problem to the long term value of the stock.<p>Apple has some very serious competitive risks (Android) and some very serious internal risks (Jobs' health). Apple's stock price is based on the idea of maintaining 30% growth for the next few years, that's a much more difficult goal than to lose 2% per year. Also, Moore's law is still relevant in the mobile market meaning that people replace their phones fairly frequently to get better hardware support. A mobile phone from 5 years ago is clearly inferior to most people whereas a computer from 5 years ago is mostly adequate for most users. What this means is that there is still time in mobile for a major competitor to emerge. The desktop PC market is locked up and belongs to Microsoft. The desktop PC running Windows is also a core part of the business to a lot of companies in the same way that Mainframes are to the financial industry. Yes, Microsoft's Desktop PC business will continue to decline for years, but it's a steady essentially risk free revenue stream. The mobile revenue stream is still largely up for grabs.<p>Microsoft also has big inroads into enterprise sales which could solidify WinPhone 7 in the enterprise which would bring in some pretty big bucks.

So while the article notes several times that "Microsoft is not making items that customers want", it seems that this is addressing the consumer customer. But isn't Microsoft addressing what the enterprise customer wants? And isn't this a serious chunk of where their income is coming from.<p>While I am not seeing flaws in the argument here, I am slightly skeptical, as for multiple decades I have witnessed many people underestimating Bill Gates, and now I wonder if that continues.<p>(I remember a time where Intel was skeptical of compilers produced by tiny companies such as Microsoft--they got no respect whatsoever.)

Is there anyone out there with a background in economics who could explain why it's reasonable to expect a company's revenues to grow indefinitely? I get that there's inflation, so there will always/usually be some upward pressure, but surely there are natural limits?

It would seem "Wal-Mart disease" is a good place to look for start up opportunities. Look for companies suffering from Wal-Mart disease, then think up ways to compete against them.

<i>"Microsoft has caught the “Wal-Mart Disease” – constantly trying to do more of what it always did, hoping it can regain old results – even as the market keeps shifting. In stalled companies, executives cut costs in sales, marketing, new product development and outsource like crazy in order to prop up earnings. They can outsource many functions. And they go the resorvoir </i>[sic]* of accounting rules to restate depreciation and expenses, delaying expenses while working to accelerate revenue recognition. While Microsoft had higher earnings than last quarter, it wasn’t because customers were excited about their products!"*<p>Not only is Hartug's claim regarding Microsoft suffering from Walmart disease unsupported by a substantial evidence, e.g. examples of Microsoft cutting back on marketing - just look at WP7; or outsourcing new product development (one example would be nice), but it also ignores the fact that although one could argue that Windows 7 was more of the same, the Kinect was not exactly what their customers wanted but that it was delivered at the right price and in high volume.

Not surprising. In 2005 they hired wal-mart's COO. <a href="http://www.microsoft.com/presspass/press/2005/aug05/08-04TurnerPR.mspx" rel="nofollow">http://www.microsoft.com/presspass/press/2005/aug05/08-04Tur...</a><p>Edit: (or to be more pedantic, they hired Kevin Turner, a Wal-Mart executive to be their COO)

the Microsoft COO is from Walmart, so its hard to see why anyone should be surprised by this turn of events.

I did a quick sum of the quarterly losses in that chart, and came to a total just shy of $8 billion