Microsoft — 3 Pros, 3 Cons

The past decade has been particularly tough for Microsoft (Nasdaq: MSFT ). 
Accustomed to being the tech bellwether, the company has looked like a plodding
also-ran.  The average annual rate of return on the stock has been 1.5% since
2001.  Yes, you might as well have put your hard-earned dollars in a
money-market fund. Even for this year, the stock price is down 8.1%, despite the
S&P 500 posting its strongest gains since 1998. Can Microsoft get its groove
back somehow?  Let's take a look at the pros and cons: Pros Cash machine. In
its latest quarter, Microsoft generated $4.2 billion in operating cash flows on
$20 billion in revenue.  As a result, the company repurchased $5 billion of its
shares and declared $1.3 billion in dividends.  Consider that from 2008 to
2010, Microsoft had more than $64 billion in operating cash flows. Franchise
businesses.   Microsoft has a set of blockbuster business segments.  They
include Windows, Office, the Xbox and the server division.  For example,
Windows 7 is the fastest-growing operating system in history and has already
sold over 300 million licenses.  Also, the Kinect gaming system has been a big
hit, with 8 million of the devices sold in the companys most recent quarter. 
The cloud.   This is a megatrend in technology.  Essentially, cloud technology
uses the Internet to provide business applications.  It tends to be cheaper and
more productive.  The good news is that Microsoft has the infrastructure,
developer network and software to benefit from the growth.  In fiscal 2010,
Microsoft spent $8.7 billion in research and development with much of it going
into cloud technologies.  In fact, the company expects to have 90% of its
40,000 engineers to work on these offerings. Cons Brain drain.   Microsoft has
had various departures of top executives.  One of the latest was Bob Muglia,
president of the company's Server and Tools Business division. 
Unfortunately, Microsoft executives are seeing better opportunities from
exciting companies like Facebook, Google (Nasdaq:GOOG) and Apple (Nasdaq: AAPL
). Lack of focus.   With huge cash flows, Microsoft has been aggressive in
investing in new businesses.  The problem is that there seems to be few
synergies.  Should Microsoft really have the Xbox or its Bing search engine? 
Could these far-flung operations mean distraction for management?  If anything,
the best approach may be to spin off some of these businesses. Threats.  
Cash-cow businesses are always fat targets for competitors.  While Microsoft
has done a good job at protecting its franchises, there are definitely major
threats.  Google is making inroads with its own Office-like productivity
applications, for instance.  But perhaps the most vulnerable division is
Windows.  Let's face it there is a move toward smartphones and tablets. 
Yet Windows Phone 7 platform is a distant laggard when compared to Apple's iOS
and Google's Android.  The company did recently struck a deal with Nokia
(NYSE: NOK ), but unfortunately, thats a partnership with another company that
has had a poor performance in the smartphone and tablet markets.  Verdict In
the near term, Microsoft should benefit from the improvement in the economy. 
This should result in higher spending on information technologies. Despite this,
Microsoft will have a tough time maintaining its competitive advantage.  Again,
the biggest threat could be with its mobile strategy.  Even though Microsoft
looks like a good value, the cons outweigh the pros for the stock.