Ballmer's Out: Will Microsoft Turn Around?

James Dennin, Kapitall:  Microsoft (MSFT) CEO Steve Ballmer is retiring, just as PC sales are projected to rise into 2014. That should be music to the ears of a company so dependent on robust PC sales. But Microsoft has seen declining PC revenues for years, as Apple (AAPL) surged and start-ups cornered a booming market for mobile devices.

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Still, many of the biggest tech stocks in the Dow, from Microsoft to Hewlett-Packard (HPQ), have been making quiet (and not so quiet) changes that subtly acknowledge the mounting pressure to innovate if they are to stay competitive. 

The most high-profile change of late is Ballmer's upcoming departure, who company insiders refer to as more of a " bean-counter" than an innovator or inventor. As Microsoft's skeptics have pointed out, it's far less coherent than most technology companies. A majority of its revenue comes from its business division – its bread and butter has long been IT departments who are wary of acquiring technology that changes too quickly. However it also dabbles heavily in gaming, software, and web-services, a practice that arose from Ballmer's bad habit of acquiring companies and then failing to incorporate them gracefully into Microsoft's corporate structure. Even worse, this has had a tendancy to drive much of Microsoft's younger talent to more youthful competitors – the median age at Facebook (FB) is almost a decade lower than Microsoft's.

Ballmer's departure was seen by the market as a primarily positive development for a company that needs to change directions if it is going to remain competitive. Even if PC sales begin to rebound, it is only projected to change a modest 5%. And many have also pointed out that Microsoft's efforts to keep Windows relevant with fancy new software and interfaces is precisely the kind of tinkering that IT directors – Microsoft's biggest customers – are trying to avoid. 

And yet, the diversification Ballmer oversaw at Microsoft also has the potential to be good thing. Even though shares rocketed up at the prospect of a new CEO and therefore a new direction – its diversity gives it some resilience in the face of declining PC sales. Intel's (INTC) efforts to supplement falling PC revenues by building chips for mobile devices have failed to corner more than 1% of the market. Another sign of trouble for the large-cap is the company's recent announcement that they are forgoing their usual dividend hike, citing falling revenues. Earnings per share (EPS) fell almost 11% this year. That's less than HP, whose EPS is down almost 300% from last year.  Cisco (CSCO)  might be in trouble as well – the company announced this morning a plan  to lay off 4000 workers

This news is a far cry from Microsoft, which still remains relatively profitable, with a return on equity at a healthy 16.6%. Many are now arguing the problems there are primarily cultural, having little to do with the company's finances or its hardware.  In a war fought amongst competitors who once relied on PC sales, Microsoft now looks like a leader, not a follower, in establishing independence. But it needs to revive an ailing corporate culture. Many of the fundamentals are there : huge budgets for R&D, a strong balance sheet, and (admittedly modest) revenue growth. Therein lies the foundation for a long-term plan to prove PC detractors wrong.    

Click on the interactive chart below to see returns over time. Sourced from Zacks Investment Research. 

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Will PC sales recover, or can Microsoft rely on acquisitions to pay off in the long-term? Use the interactive list below as a starting point for your own analysis. 

1. Microsoft Corporation ( MSFT): Develops, licenses, and supports a range of software products and services for various computing devices worldwide. Market cap at $289.99B, most recent closing price at $34.75.

 

2. Hewlett-Packard Company ( HPQ): Offers various products, technologies, software, solutions, and services to individual consumers and small- and medium-sized businesses (SMBs), as well as to the government, health, and education sectors worldwide. Market cap at $43.21B, most recent closing price at $22.40.

 

3. Cisco Systems, Inc. ( CSCO): Designs, manufactures, and sells Internet protocol (IP)-based networking and other products related to the communications and information technology industry worldwide. Market cap at $128.06B, most recent closing price at $23.86.

 

4. Intel Corporation ( INTC): Engages in the design, manufacture, and sale of integrated circuits for computing and communications industries worldwide. Market cap at $111.71B, most recent closing price at $22.44.

 

 

( List compiled by James Dennin, Kapitall writer. All financial data sourced from Finviz.)

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