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People try out Microsoft Corp.’s Windows 8 operating system at an event for its debut at the Akihabara electronics store district in Tokyo, Oct. 25, 2012. (Toru Hanai/REUTERS)
People try out Microsoft Corp.’s Windows 8 operating system at an event for its debut at the Akihabara electronics store district in Tokyo, Oct. 25, 2012. (Toru Hanai/REUTERS)

Technology

The Microsoft divide: 3 reasons to buy and 3 reasons to sell Add to ...

Microsoft is hoping Friday’s launch of its new Surface tablet and Windows 8 operating system will reinvigorate the company’s long-lost reputation as a product innovator. But will it light a fire under the company’s stock? We look at the pros and cons of investing in the house that Bill Gates built.

THREE REASONS TO BUY

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1. It’s cheap

Trading at less than 11 times earnings, it’s a bargain compared to other software giants, such as Oracle Corp. (price-to-earnings ratio of 15) or SAP AG (P/E of 22).

Many companies with modest P/E ratios are cheap because analysts doubt their prospects; the opposite seems to be the case with Microsoft. Twenty nine of 42 analysts who follow the company rate it a “buy.” They like its massive cash hoard – $67-billion (U.S.) in cash and short-term holdings at last count – and its minimal debt.

 

2. It keeps on giving

Microsoft is good to its shareholders. The company raised its quarterly dividend by 15 per cent in September, after a 25-per-cent boost last year. It now offers a dividend yield of more than 3 per cent – a better return than you could get on a high-interest savings account.

3. It’s growing

Despite its huge size, Microsoft is still expanding at a more than respectable clip. Its revenues expanded from $60-billion in fiscal 2008 to $74-billion in fiscal 2012, which works out to an average annual growth rate of 5.4 per cent.

The question, of course, is whether it will keep on growing. The star of the Friday product launch is the Surface, a tablet that has garnered positive prerelease reviews for its sleek design and an optional cover pad that can transform itself into a keyboard.

A much bigger issue is the new Windows 8 operating system, which is being touted as the series’s biggest reboot since Windows 95. The latest offering catapults Microsoft into the touchscreen era but has been criticized as confusing. Microsoft’s fortunes hinge on the willingness of its core market, the business user, to make the transition to the new operating system.

THREE REASONS TO SELL

1. The sun is setting on desktop computers

As the tablet market soars – market research firm IHS iSuppli expects 123 million of these devices to ship this year alone – it’s expected that sales of PCs will fall this year for the first time since 2001. Jyske Bank’s Robert Jakobsen, the only analyst to give Microsoft a “sell” rating, according to Bloomberg, says worries about Microsoft’s post-PC strategy are reflected in its stock price, which has fallen from above $32 in April to below $28. “Clearly they are being pushed by increasing competition from the tablet side,” Mr. Jakobsen said. “As of now, they haven’t been able to bounce back.”

 

2. A history of stumbling

In the decade after Windows 95’s release, Microsoft managed to build a reputation for stale, boring products. It has mostly jumped on trends rather than started them, often with disappointing results. The Zune portable media player and the Kin mobile phones both flopped.

Even its operating systems have struggled. Windows Vista was widely panned, and many of the features that made Windows 7 appear innovative were already available on Apple’s OSX.

 

3. Its strategy is confusing

Windows 8 is supposed to offer users a way to use the same operating system on both PCs and mobile devices, but Surface tablets released Friday won’t come with the full Windows 8. Instead, they’ll come loaded with Windows RT, a stripped-down version that lacks the full functionality of a desktop operating system. Windows 8 on Surface will be rolled out in three months, which risks confusing consumers. Microsoft is taking another big chance by allowing the new operating systems to be licensed for third-party tablets while building its own hardware. That risks alienating other hardware manufacturers.

“They want to pretend it’s not a big deal, that [third-party manufacturers] should not interpret it as a big deal, and consumers should have one more choice,” said Sarah Rotman Epps, a senior analyst with Forrester Research. “But in the same breath, they say their product is the best hardware to run Windows.”

 

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