The company's major business lines, including Windows, are facing secular headwinds and that's not changing anytime soon, with PC shipments declining 14% year-over-year according to IDC and 11.2% according to Gartner. Microsoft is facing the heat of a post-PC environment faster than most expected. The reception to Windows 8 has been nothing short of dismal, even though Microsoft owns 90% market share in the PC operating system space. Most of that market share comes from Windows 7, Windows Vista, and to an extent, Windows XP, which the company recently announced it would stop supporting in 2014. Microsoft has many business lines, outside of Windows, and potentially breaking up the company could be worth it for shareholders. Bellini pegs the sum of the parts of Microsoft at $37, though she doesn't see that as likely given the company's synergies across its different groups.
Two more likely options are for the company to leverage its incredibly strong balance sheet, returning more cash to shareholders, or cutting expenses. Bellini believes Microsoft will generate $32 billion in cash flow from operations, with $17 billion of that pegged toward spending, buybacks and dividends. That leaves an additional $15 to return to shareholders. If the company were to leverage its overseas cash (Microsoft had $68.3 billion in cash and equivalents on its books at the end of the 2012), by issuing debt, it could further drive higher returns for shareholders. This was given a "low to medium" probability. Microsoft is in an arms race with Samsung, Apple, Google, and others, so cutting spending is not as likely to happen as leveraging its cash hoard, but it's something for Microsoft to consider. -- Written by Chris Ciaccia in New York >Contact by Email. Follow @Commodity_Bull