Microsoft Down but Not Out

NEW YORK ( TheStreet) -- After what is considered to have been disappointing second-quarter earnings results from Microsoft ( MSFT), the street seems annoyed that the software giant has now expressed interest in Dell ( DELL). What possible advantage could there be with two tech "has-beens" coming together?

Although it's true that neither Dell nor Microsoft have produced growth in sufficient quantities, there is an angle here that seems to be overlooked by many observers. For that matter, Microsoft's recent earnings report, though uninspiring to some, was actually pretty good. It suggests that Microsoft's interest in Dell is not the head-scratcher that it appears to be on the surface.

Microsoft had a lot to prove in the second quarter, after a brutal first quarter that missed both top and bottom line estimates. And with analysts filled with pessimism following Apple's ( AAPL) revenue miss, Microsoft surprised the street -- earning 76 cents per share on a GAAP basis -- beating EPS estimates by a penny. Revenue was also solid -- arriving to $21.46 billion, 3% higher year over year.

Granted 3% revenue growth is far from breathtaking. But it reverses an 8% decline in Q1. Likewise, profitability was weak -- shedding almost 4% year-over year. But relative to the 22% drop in Q1, Microsoft deserves credit for this improvement.

Then again, this is far from the performance that investors wanted to see from a dominant tech company -- an issue that has long been a source of aggravation among analysts. However, that Microsoft saw 34% sequential improvement suggest that Windows and Surface are beginning to gain traction, which brings us to the company's interest in Dell.

For instance, the 24% growth of the Windows division was a welcomed surprise -- especially since it followed a 33% plunge in Q1. As a result, Microsoft was able to grow its operating income by 14%. The company said that this was attributed to the better-than-expected performance of Windows 8, which was launched in October.

All of this means that although Microsoft's PC dependency is seen as a dark tunnel, at least a light has now been sparked. And Microsoft just realized a way for Dell to make this light brighter. It's no secret that Microsoft wants to adopt Apple's ecosystem model.

Although at one point, Microsoft focused solely on software and relied on OEM partners such as Hewlett-Packard ( HPQ) to produce the hardware, this all changed recently when Microsoft decided to build its Surface tablet in an effort to compete with Apple's iPad dominance. However, Surface sales have not taken off as expected -- at least not according to initial sales figures.

However, with Dell's strength in hardware and Microsoft's software dominance, all of this can change. It is not farfetched to think that Microsoft could then produce a unified system that could take on Apple. But will it be strong enough to save a dying PC industry? While I that should not be the focus, Surface has proved that Microsoft is capable.

However, that the company has resisted supplying specific sales figures for Surface is not encouraging. But if we are left to our own assumptions, the results are mixed with a slight bias toward the negative side. But there's hope -- especially since Microsoft said it sold 60 million Windows 6 licenses in the quarter.

Then again, Amazon's ( AMZN) new Kindle Fire also continues to be a top seller on the market. At an attractive $199 price point, this only increases the pressure on Surface to be more than advertised. Right now, it's not off to the market-shaking fury that the company hoped.

The good news is that Microsoft understands what it is up against. And the company seems eager to morph out of what it is traditionally known for. In the process, if it can buy itself some time by investing in Dell, what's the problem with that? What else is it going to do with its cash after having just raised the dividend? Sit on it?

The PC industry is dying. And if Microsoft feels that it can keep it on life support a little bit longer while it figures out its mobile strategy, then investing in Dell is as good of a venture as any. On that basis, I would continue to accumulate the stock at current levels. Despite the pessimism, this is a company that still generates tons of cash flow and also pays a great yield.

At the time of publication, the author was long AAPL.

This article was written by an independent contributor, separate from TheStreet's regular news coverage.
Richard Saintvilus is a private investor with an information technology and engineering background and has been investing and trading for over 15 years. He employs conservative strategies in assessing equities and appraising value while minimizing downside risk. His decisions are based in part on management, growth prospects, return on equity and price-to-earnings as well as macroeconomic factors. He is an investor who seeks opportunities whether on the long or short side and believes in changing positions as information changes.