Microsoft Becomes a Battlefield Stock

NEW YORK ( TheStreet) -- Don't look now, but Microsoft ( MSFT) has replaced Apple ( AAPL) and Netflix ( NFLX) as the market's favorite battlefield stock.

There are analysts who consider the Redmond. Wash.-based software house to be dirt cheap, and there are others who think the whole edifice is about to come crashing down.

Those who consider the stock dirt cheap point to recent Apple-like moves, a dividend hike and stock buyback. Those who see imminent doom point to the slow up-take of Windows 8, the failure of Windows Phone against Apple, and the Azure cloud's troubles competing with the Amazon.Com ( AMZN) cloud.

CEO Steve Ballmer, who has announced his retirement next year, defended the company this week with an analyst webcast. He said only 20% of revenue comes from consumers, only one-quarter of revenue comes from Windows, and that more than half of all revenue comes from outside the United States and Canada.

Our Barry Randall calls what has happened with Microsoft under Ballmer "value compression." The price paid for its earnings has fallen, from 47 times a decade ago to 13 times now. The company has grown, but has not surprised, and just as with Apple is now valued more for the cash it gives todaythan its growth prospects tomorrow.

It's going to be hard to change that trajectory, because Ballmer has set a firm course for the company's future in buying Nokia, and his successor will be chosen by people loyal to him.

Many fail to see Microsoft's stock course as Apple-like because the battlefield appears small, the $5 per share between $30 and $35. But Microsoft has nearly 10 times as many shares as Apple, 8.3 billion. If the two companies had an equal number of shares, Microsoft would be trading in a $300 to $350/share range.

My own view is that Wall Street prefers monopoly to competition, and that the U.S. Justice Department was more successful in attacking Microsoft on anti-trust grounds than anyone will ever know.

While Microsoft won the battle, it lost the war. It was forced to add layers of bureaucracy, professional naysayers, to its ranks, which frustrated its best people and eventually destroyed its innovative capacity. Like IBM with Windows, it became vulnerable to the first "kid with a Clue" who came along, and many did.

The best choice then, I thought, was to break it up. Separate the enterprise business from the consumer business. Separate the utility businesses from the competitive businesses. But Ballmer's moves, and technology's progress, have conspired to make that almost impossible, except for the possible sale of the game unit.

Here's why.

A device company, and a PC now is no more than a device with a keyboard, depends on the backing of a scaled cloud in order to function. It requires integration through a network for support, for software sales, for its very being.

There are now four cloud-device companies - Apple, Google ( GOOG), Amazon.Com, and Microsoft in that order - and it's hard to see another company getting into the mix because of this cloud-dependence. Of the four, Microsoft's position is weakest, because Windows is much weaker in the devices market than Android or iOS.

Microsoft is betting that its enterprise dominance is going to keep it in the game until it can fix the problems with mobile Windows. BlackBerry ( BBRY) thought that, too. But Microsoft is embedded far more closely into big businesses than BlackBerry ever was, so it would be foolish to dismiss it.

Recently, as readers here know, I took my daughter on a cruise to Norway. The boat, owned by Royal Caribbean ( RCL) had its own Apple store, and the computers in its "telegraph room" were all Macs running what it called WiFi (actually a shared satellite link providing modem-like speeds).

But down inside the ship, in the kitchens and in the back-end processing, everything was Windows. A lot of it was Windows XP.

Microsoft plans to retire XP next year and force business customers to upgrade. The success or failure of that effort, the decisions of companies like Royal Caribbean, will say more about the company's future than anything that comes out in the media.

At the time of publication, the author held AAPL and GOOG.

At the time of publication the author had no position in any of the stocks mentioned.

This article was written by an independent contributor, separate from TheStreet's regular news coverage.
Dana Blankenhorn has been a business journalist since 1978, and a tech reporter since 1982. His specialty has been getting to the future ahead of the crowd, then leaving before success arrived. That meant covering the Internet in 1985, e-commerce in 1994, the Internet of Things in 2005, open source in 2005 and, since 2010, renewable energy. He has written for every medium from newspapers and magazines to Web sites, from books to blogs. He still seeks tomorrow from his Craftsman home in Atlanta.