I’m going to take advantage of the half-hearted bounce this week to sell Microsoft (MSFT) out of Jubak’s Picks. (For more on this bounce, see my post https://jubakpicks.com/2010/06/10/return-of-son-of-bounce/ )
The stock has not performed well on up days for the market and looks locked into a short-term downtrend. (On the chart Microsoft is flirting with a negative cross-over where the 50-day moving average breaks below the 200-day moving average.)
 I might want to own this one in the fall again when visions of higher sales for the Vista operating system and for Office 2010 start to dance in investors’ heads.
But for the summer I think I’d rather sit in cash and preserve my ability to put my money into the best opportunity of those that will eventually present themselves after the current correction (or whatever) gets resolved.
This sale will move my cash position in Jubak’s Picks up to about 37%. I’m selling with a 6% gain since I added the stock to the portfolio in July 2009.
Full disclosure: I will sell my personal position in Microsoft three days after this is posted.
What about Intel? If upgrades to Windows 7 are not as fast as expected, then maybe Intel would be a sell and buy back later?
msft takes on cheap debt now, because if they ever want to take on debt in the future, it won’t be at these rates…look for a special divi.
I’m not selling…to paraphrase Bill Fleckenstein, if Msft can’t succeed in this environment, then no one will. Even Jim said he’s looking to get back in the fall…
msft pe is at 13 when apple is 21. i cant see apple stock beating msft next one year.if there is one stock to sell now, i believe it is apple
To borrow from Steve Jobs, “And one more thing…”
Regarding davcbr saying “Corporations are starting to look at the costs associated with distributed computing and there will be a move over the years toward the old style central server, or some sort of hybrid. Lots of reasons for this, but ultimately its cost driven…”
This is a really astute observation and highlights the point that technology is not like retail. For a company of any significant size, there are no off-the-shelf computing solutions. Sure, they buy desktops from DELL or servers from HPQ and software from MSFT and SAP. But that’s just the beginning of the process of, say, rolling out Win7 across the company.
A whole article could be written on just the different players involved, not to mention how services like salesforce.com, Google Apps, and Amazon Web Services upsets the traditional upgrade cycle.
Then you’ve got all the custom IT consulting and software development needed just to get these systems working together. And we haven’t even started talking about custom app development, which is what really starts giving companies an unfair IT advantage over competitors.
There is a huge shadow economy of business software development. As Windows dominates desktop systems, so MSFT development technologies are going to have prominence on the desktop. Likewise in server-based service development, where MSFT is very strong, but its software stack is not as dominant and open standards have more of a foothold (and hence there is room for competing development technologies).
Mobile is a growing market where MSFT has small and diminishing influence, and you can see the fallout from that in the huge surge of interest in Apple development technology (Objective-C), related technolgies (HTML5 and web standards in general), and direct competitors (Android, Flash).
@CallOfDutyFan
I know a lot of wicked smart people who work either for MSFT or within its technology ecosystem. The problem is not with the people who are actually building things…
@davcbr
The “cloud” is just the ability to run programs and store data on remote servers. As I see it, the difference between the old-school “thin client” concept and the current “cloud” is two-fold:
1. “Thin client” assumed a monolithic central server resource and a dedicated (often proprietary) desktop client.
2. The “cloud” encompasses location-agnostic services, seamless expansion of storage and application services across servers on demand, and standard-based access via commodity client hardware.
If you unfocus your gaze, they really look about the same. The cloud is thin client with infinite resources, using open standards, and it doesn’t care what client you use as long as it’s compliant with the standards employed by the services.
Of course, this non-monolithic cloud comes in a lot of flavors, each slightly optimized for a different use. IMHO that’s really cool and the competition will drive innovation at an incredible pace.
The downside, I think, is a bit of turbulence as the pace of innovation increases. We’re seeing that already in the sub-yearly cycles of mobile device and web-site upgrades.
Also, there are very few pure investment plays in this new market. I have no idea where to put my money here, so am content to observe and play with the shiny toys right now.
@sigli Thanks!
Something to note when looking at the long term for MSFT in particular. Corporations are starting to look at the costs associated with distributed computing and there will be a move over the years toward the old style central server, or some sort of hybrid. Lots of reasons for this, but ultimately its cost driven. So I wopuld expect that you need to look at MSFT as competing more with the various unix derivatives than even now. Personally, I think the idea of “cloud computing” [over the internet] will not fly in the corporate world; I might be wrong on that.
But what I am aiming at is that MSFT will be viewed more as a coporate supplier, while AAPL will be seen as a consumer product maker.
I’d love to see both of you post a lot more after this. It’s great to read something that goes beyond level 1, and you’re both an very good upgrade to the comments section here. Keep it up!
One last post – I’m more of a buy and hold guy. I place about 10 trades a year. 🙂
@southof8
Apple’s cut is 30 cents for every dollar a consumer spends on apps. The last I heard, they had sold about 5 billion apps to date. It is a good source of revenue, but the bigger thing is that they have struck a symbiotic relationship with lots of creative developers on the street. It’s a win-win for Apple and the average developer.
Apple’s share of the US computer market was 8% last I heard. They have a lot more room to grow, and probably will on the consumer side. On the business side, there is potential too. Steve Jobs’ NeXT machines were bought by quite a few companies and used well until the early 2000s. (I used to work for a company which used NeXT boxes for trading derivatives – they were WAY ahead of their time and were still rock solid in 2002.) So you never know, Apple may just be successful if they make a wholehearted attempt at the business market.
My recommendation is to keep adding Apple on dips. I have owned them since 2004, and it’s been a good ride. People do complain that Apple = Steve Jobs, but Tim Cook did a good job of running the company was Steve was out sick.
@tpdorsey
I agree that Microsoft has been dissipative with its resources, and its execution track record is bad. (Vista, Windows Mobile, Zune, the list goes on). I personally feel that they are also somewhat complacent and don’t innovate as well as other companies. Some of the best programmers I worked with are now at Google, and the few people I know who are at Microsoft are definitely not in that league. (Caveat: Small sample size; I’m sure Microsoft has several geniuses on their payroll). But their stock is reasonably priced and there is a decent margin of safety.
In the long run, I wonder where the industry is headed. Back in the 60s and 70s you had “verticals” with companies making the hardware, software and everything that went with them. Apple is pretty much using that approach and is whipping everyone else. So you never know – we may head towards a future where Google and Microsoft start imitating Apple, and all have their operating systems, productivity/other software, search services, mobile devices, etc. I would expect some amount of interoperability though – like Android running on different mobile devices, Windows running on different hardware platforms, Java-based software running on all platforms, etc. I hope you see what I’m trying to say.
Agree with tpdosrsey – MSFT is perfect for trading and i love it for this only. forget all the techie fundamentals. we all know that MSFT (except for few sparks of brilliance at the beginning) is always playing “catch-up” and believes in throwing billions and billions till they get it.
It is not going to zero and never getting out of reach. see how many people got burned with commodity and oil plays over the last few years…. with MSFT go long (I sell puts) below 27 and then short at about 30. Perfect idyllic play.
One last post…
I should qualify the statement “In none of these spaces does MSFT have a market leading product or service, nor are any of them signficantly profitable. Most are money sinks at the moment.”
In virtualization, MSFT has well-regarded products, but they are either free or have become features of Windows. Still, competing products (some free open-source) are becoming more compelling faster than the MSFT offerings.
In cloud computing, Windows Azure looks pretty good in its niche. Time will tell whether MSFT can leverage what little advantage it has here and whether it can be a significant contributor to the bottom line.
The problem is one of big numbers. It’s difficult to look good when your big brothers can pull in $1b in profit every month with little (obvious) effort. Small victories, no matter how hard won, pale in comparison, and we really can’t count on long-term sustained execution in that environment.
Again, Xbox is the popular example, but notice how poorly MSFT has leveraged successes in Xbox Live, for example, across other nacent product offerings.
Apologies for the long ramble here, but in some ways I think it’s important to look beyond the individual shiny technology offerings and instead look at the record of execution. Which is not good.
All that said, my strategy with MSFT has little to do with execution, and more to do with trading ranges. I think about buying under $25 and always sell half my holdings when the stock edges over $30.
Short version of above: MSFT = DEC
We know what happened to DEC.
Here’s how I evaluate MSFT.
MSFT makes the bulk of its profits from Windows (desktop and server), Office, SQL Server, dev tools and the business apps division (which I admit to not knowing much about).
The industry is moving into ad-supported content (search is only part of it), mobile devices, cloud computing, distributed computing, virtualization, social apps and location-aware apps.
Microsoft has at least a toe in most of these markets and has publicly spent pretty big amounts of money chasing most of them. In none of these spaces does MSFT have a market leading product or service, nor are any of them signficantly profitable. Most are money sinks at the moment.
In all of these spaces, MSFT has competitors with mature, profitable products and active, enthusiastic third-party developer ecosystems. And yet, MSFT continues pouring money into chasing these competitors. And so far they have pretty much zero track record of making it to profitability in these markets, much less carving out a sustainable niche.
(At this point someone would normally mention Xbox as a counterargument. Yes, it has achieved profitability and stature in it’s market, but a great cost, and with unknown stustainability. And the investment was staggering….)
Monday, Steve Jobs announced iPhone 4 on the first day of WWDC. Did you know that there’s also a major Microsoft conference, TechEd, happening this week in New Orleans?
Conventional wisdom is that MSFT needs to keep investing in these new markets and technologies. As if the problem that wasn’t solved with the last billion dollar spend will be solved with the next billion. In the face of years of poor execution.
Sorry. Ain’t gonna happen.
If a company does something well and profitably, IMHO it should focus on doing that. Wasting money on things it demonstrably cannot do is wasting my investment in the company. I think MSFT needs to take a cold, hard look at these nonperforming businesses and cut them loose. Focus on what they do well. Anything else should be skunkworks projects on spare time.
Sounds not sexy, but it sounds like sound business.
McGon-
Get off this blog!
Sold it 3 weeks ago, but thanks for confirming my decision.
CallOfDutyFan–thanks for putting your engaged thinking on paper. Reading your thoughts was very refreshing.
Duty, I’m not a techie so if you (or anyone) could provide insight on the following, I’d appreciate it.
How much $$ does Apple make on the gazillion “apps” that its users are downloading? Is there a point of diminishing returns?
or can the technology (the bandwidth, the speed, the network, whatever- again, I’m not a techy- perhaps architecture is a better word) handle as many apps as people dream up, each app generating $$ for Apple? If so, it seems as though Apple has created something of a toll road, for which its customers pay to build the road, and for which its apps developers pay to drive on the road. Is that how it works?
I’ve never owned apple because the last several years its been priced for perfection in my view. But boy, it’s performance and execution seems perfect. It seems to make money beyond simply selling neato gizmos to everyone wanting neat gizmos. I’ve owned MSFT because it’s a cash cow, puts its cash into shareholders’ pockets, is priced like a utility, and is ubiquitous. Every business uses MSFT products, like them or not, and in my view that won’t change.
But what happens to Apple when everyone has an Iphone, an Ipod and an Ipad? Seems the Apps could drive it to the next level but that’s over my head.
Jim – are you making a 2% allocation for each pick? That fits mathematically, but I thought the picks portfolio was somewhat smaller than the Picks 50.
As a techie, I would not count Microsoft out. I think their shares are in a fair price range now. Here is my analysis of the three way fight between Microsoft, Apple and Google.
Granted Apple still has tremendous growth opportunity, Microsoft’s products are still solid and provide more bang for the buck than Apple IMHO. I own both Microsoft and Apple products, and prefer to use Microsoft hands-down when it comes to business.
Speaking of business, Microsoft’s offerings are really broad – Active Directory, SQL Server, Exchange, IIS, etc. etc. etc. They compete against Oracle, IBM and other players in that space and have held their own.
Google is making inroads with Android, but it won’t be able to really hit Microsoft or Apple until it comes out with its own desktop operating system (Chrome OS, Android Desktop OS, whatever you want to call it). So far, that has been vaporware.
Microsoft owns a stake in Facebook, which is now the most visited web site in the world. If Ballmer can convince Mark Zuckerberg to put a little Bing search bar in Facebook, you will see Microsoft starting to take some of Google’s bread and butter.
Few other unknowns:
1) Will Android beat iPhone? (similar to the way MS-DOS beat Apple’s hardware/software combo in the late 80s / early 90s?).
2) How much of a hit will Google take because of the iPhone’s new advertising interface (iAds) and the general move in the future to mobile devices?
3) How good will Windows Mobile 7 be? Will it be able to attain good market share in the crowded smartphone market? Will Bing be integrated with it? If yes, expect Microsoft to eat into some more of Google’s bread and butter if Windows Mobile 7 takes off.
4) What about Nokia? HP? Are they going to be also-rans? Was HP’s purchase of Palm a mistake?
This fight is going to be very interesting. My hunch is that Google will be at a disadvantage if it does not come up with a desktop OS and products like Office which will plug into online Google Apps. Microsoft has a strong “desktop” presence (Office) and it will be easier for them to move into the online space and fight Google Apps.
I don’t know how some of these variables translate into dollars. I have not dug deep into financial reports to figure out the “weights” of these variables. But my intuitive hunch says that although Apple stock has a lot of coolness and glitz to it, Microsoft stock may just be more value for money (just like its products). I am not convinced that Google stock is a a good purchase today, unless they make some smart strategic moves. As long as Google’s bulk of revenue comes from search, they are a one-trick-pony whether you like it or not.
Disclosure: I am long all three companies.
On another MSFT note, why in heavens does a company sitting on a pile of cash issue any kind of debt? Do you suppose another big one time dividend is coming so Mr. Gates can have some more cash to give away?
Congrats Jim on getting out with a profit. When you added them I thought it was a mistake and said so at the time but if you get a profit on a bad idea in a bad market it is worth noting.
In five years MSFT will probably be right where it is now or perhaps even lower because the tech market is passing them by. I read the WSJ interview with Ballmer and Ozzie for the recent All Things Digital issue and I have never in my life seen so many buzzword banalities crammed into a short interview. Ballmer especially does not seem to have a clue and still appears shocked and stunned that people prefer products from other companies. The way they blew the mobile phone market is epic. I think BING (idiotic name btw) may be the best thing they have done in years but I doubt they are making any serious money from it. Xbox is also very popular, especially Xbox Live but again they are both money losers. NOTHING they do can replace the huge cashflow from Windows and Office that is slowly but surely drying up.
No wonder Ballmer always looks so stunned. I wouldn’t want his job, even though I would surely be willing to take his paycheck!
After they announced $1B in new debt, I was looking at dumping this. Thanks for confiriming my view, didn’t make much, didn’t lose either!
7% return in the king of all deflationary environments is a very good thing. Thanks!
You were the last cheerleader of MSFT and your reasons for selling has confirmed what I have already reluctantly concluded – there is more downside risk right now than upside. On a day when the market goes down 2%, MSFT goes down by at least that much. On a day when the market rises 2% (like today), MSFT barely budges.
With GOOG, AAPL, CSCO and ORCL (not to mention IBM) attacking it from all sides, there are a lot more questions about MSFT’s future than answers. Curious what you think about the current “Fire Ballmer” mantra some folks are on?
Jim,
You mean Windows 7, not Vista, right?