How important is mobile to MSFT? Today's earnings might tell us.

by Wayne Ferbert on October 18th, 2012

Microsoft announces earnings after market today. Should be an interesting read. The firm continues to be a juggernaut in technology and still has several cash cow businesses that are driving the bus.
But an article in the Wall Street Journal asks the question today: If Microsoft can’t get its mobile strategy worked out, will it become a value trap stock – a la Hewlett Packard (HPQ) and Dell (DELL)?
You can check out the article here.
Given the long-term importance of mobile to almost all technology companies, the long-term answer to this question is obvious. MSFT must show traction in mobile over the long-run to stay relevant and grow its business.
The article argues that they must start to show that traction sooner or the stock will begin to act like a value trap – instead of the value play that many investors think it might be. The article makes a great point also: MSFT trades at 10x its 2013 earnings which means the market must not think too highly of its ability to meet those numbers. In fact, analyst estimates for Q1 2013 have been revised downward a few times now.
The article pins the MSFT future success on Windows 8 which is supposed to begin the march for MSFT in to more mobile integration between the desktop and the mobile devices. Sounds like Apple right?
The article also points out that the Microsoft Surface tablet must be a success – not necessarily an iPad level success. MSFT needs to show that it can produce a great tablet PC that uses its new OS. It is a fair point to make.
All in all, I think MSFT’s future growth is very much pinned to this new OS – and whether Surface is an acceptable ‘pilot’ tablet PC with a Windows OS. Just look at the rest of their businesses – gaming, MS Office, search, and server software. None of these businesses is going to drive more than low single digit growth at best. This is the product that future business growth is pinned on.
MSFT needs to get better at mobile and it needs to happen fast. I am definitely interested in testing their new tablet. It won’t replace my iPad any time soon. But whether it is an acceptable replacement will help to answer the question of whether MSFT can be relevant in mobile.
One bad sign for me on MSFT has been their failure to launch the MS Office platform for the iPad. MS Office continues to be the dominant workplace productivity suite. It is even the dominant office suite in the Mac environment. However, the iPad has been out for years now and they still have not launched that software for the iOS platform. It is just a missed opportunity. It really makes me wonder if MSFT actually understands the mobile user.
Tonight’s earnings might provide some insight to MSFT’s traction in the mobile space. The next 2 quarters are probably much more important to that assessment. But tonight’s earnings will begin to paint the picture.
I wouldn’t start a position on MSFT yet – but if it shows traction in the mobile arena, I think it would begin to look attractive at this $29 level. Tonight's metrics around the Windows 8 platform and pre-sales on the OS and tablet will help us understand that traction.

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