Credit Writedowns

Microsoft is getting a bit of black eye in the press due to its about face on the Ambitious Windows 8 platform change. While the unit numbers match up well against Windows 7, there has already been quite a bit of noise about how steep the learning curve is for the operating system. Apparently, Microsoft agrees and is doing a major re-vamp. SOme people are calling it the biggest consumer product about face since New Coke. Could be. The question is whether Microsoft is making the right moves and whether this will keep the stock from floundering. I think these are the right moves and I will explain a bit why below.

I have a few threads on tech that I am going to breakup into multiple posts here. The first two threads are on Adobe’s move into a cloud computing-only based software model and on Nokia’s dogged pursuit of the windows mobile platform, now going down market into the bargain basement bin. Both of these are important signposts on where the technology industry is headed and how future business will be conducted everywhere.

What I am seeing is a second great wave of consolidation in the industry. And by that I mean that every large company is getting into the traditional space of every other large company. Let’s go down a sample list of some of the changes that are afoot.

An investment in Microsoft has been dead money for quite a while now. The stock has traded in a pretty narrow range between $22 and $32 except in late 2007 and 2008 during the financial crisis when it spiked and then plunged. The stock does sport a dividend of 92 cents a share, which is about a 3.3% yield. If you figure that Microsoft is dead money for the next few years still, then that certainly beats Treasurys. But given the increased risk, it’s nothing to right home about. SO what about Microsoft’s strategy makes it more than dead money. Let me offer a few suggestions here.

Many of the largest technology companies are making so much money that they are rapidly accumulating cash on their balance sheets. While on could argue that this cash should be stripped off the balance sheet for valuation purposes, I would argue that the cash is worth less than face value because having excess cash on the balance sheet is an invitation to wealth-destroying acquisitions. The excess cash should be returned to shareholders as quickly as possible in the form of dividends or share buybacks to prevent such an outcome.

In the tech world the big news is Microsoft’s unveiling of the Surface Tablet and Windows Phone 8 on back to back days. There is a lot of positive buzz around these two initiatives. The question, of course, is whether it will vault Microsoft into the big leagues in the mobile arena. As a stock, Microsoft is reasonably priced with a P/E of 11x and a dividend yield of 2.6%. Any additional bump in the high growth mobile space will be a big positive for Microsoft’s earnings growth and it makes Microsoft a company to reckon with in tomorrow’s big markets via its Xbox, tablet, and phone offerings. But the news doesn’t just affect Microsoft, it is a big deal for Nokia as well as Nokia is now tied at the hip to Microsoft in the mobile space.

Mashable says the Nokia Lumia 800 could be the best Windows Phone yet. The Wall Street Journal is a little more sceptical of Nokia’s Windows Mobile phone launch though. Take a look.

Here’s an interesting conversation about social media and Internet and technology companies’ adjustment to it.

Though, in the eyes of Microsoft executives, virtually any outcome might seem better than letting the company fall into the hands of Google, which still has no strong foothold in social or communication software – one of the few online areas where Microsoft still maintains a market share advantage. Unfortunately for shareholders, anything less than a stellar success might just look like billions more flushed down the drain in Microsoft’s thus far failed bids at online dominance. Even if the company can quadruple the size of Skype’s business, they will still be losing money online if nothing else changes and they will have only added a few percentage points to top line growth – neither of which is likely to move to stock price in any major way.

I would argue that this is evidence that these companies are wasting shareholder capital by plunking down for splashy acquisitions and large new capital investments that are not paying off. Cisco and Microsoft have huge cash balances waiting to be deployed. This money can go to buying back shares at inflated prices or making acquisitions of dubious value to shareholders. The right thing for these companies to do is not necessarily just restructure but change their mindset and accept that the glory days of top line growth are over. First and foremost this means increasing the dividend payout to match other sectors of the economy.

Internet search is broken.

Battered by spammers, content farms and black hat optimizers, the typical Internet search is a horrible mess. Try basic search terms like "washing machine". Or try a term relevant to this site like "Finance Blog". What you get is a bunch of tricksters who have gamed the search engines to bring their clearly less relevant sites to the top of the pile. You as the user have to wade through these sites, hoping to find something remotely relevant to your search. Many give up in frustration. And while this situation is most acute at Google because their large search market share makes them a target for these shenanigans, the situation is better at Bing/Yahoo, but pretty much the same.

How do we solve this problem?

If you saw the last round of data for the burgeoning mobile market, you would understand exactly why Nokia and Microsoft are banding together. These two companies are also rans in a market that has shifted away from voice communication to data and internet as the driving factors. According to Gartner, Nokia’s Symbian operating system is still the  dominant one [...]