NEW YORK (TheStreet) -- Investors are well aware of the concept of wealth creation. There are several ways that can be done. The first is wealth extraction from others. Another is the creation of new wealth by developing things of value.
The focus here is on Microsoft (MSFT), the creation of new wealth and what I think it's doing right.
Microsoft, like Apple (AAPL), focuses on the idea of wealth creation for its customers by virtue of paid services. Customers build their own companies and they use Microsoft's software and services to succeed financially. In other words, a non-free investment results in potential wealth creation.
This is what Apple is so good at, so this parallel, legacy vision of Microsoft means that customers are willing to engage in expenditures with the belief that they can leverage the cost into a real return on equity.
However, Apple's ads do a better job of pointing that out than Microsoft's. Apple emphasizes personal creativity that produces goods of value: Mac and iOS apps, writing, art, music,and so on. In contrast, Microsoft's ads emphasize dreary work with business software and half-baked tools like the Surface Pro tablet.
Of note is that Apple has paid over $20 billion to all its developers to date. Doing business with Apple's best-of-breed hardware and development tools has paid off. That's some serious financial incentive.
Another important point here is that in order to convince people they can build wealth safely, privacy and security are paramount. Apple and Microsoft also share that value.
For example, if a 19th century farmer worked very hard to sell his crops, then deposited his earnings in a local bank and then the bank were robbed every week, the infrastructure would fail him in his wealth creation no matter how good his tractor.
The Limits of Wealth Extraction
When customers have confidence in the tools and infrastructure, they spend their money with cautious optimism, even cheer, because the future looks good to them. They love their tools and they love creating valuable things with them.
I typically contrast this philosophy to Google (GOOG) and Amazon (AMZN), which create wealth by funds transfer for goods and some services. (Payments to eBook and app authors notwithstanding.) While the goods and services may seem like a fair value when they're received, there can be a feeling that the provider is profiting to extremes in its wealth extraction. That can create resentment and the desire to minimize expenditures. Money is always spent grudgingly.
In the long term, companies that extract wealth this way lose their glamor, appeal and trust because there's a neverending desire to extract ever more money from the customer. We're well aware of that when we deal with utility providers who artificially force success on the backs of customers.
As for Microsoft, I can see how the company believes that making its own tablet can deliver the prospect of inventive wealth creation. But Microsoft's tablet project went wrong and never got on track.
Dumping the Surface Pro tablet is the quickest way CEO Satya Nadella can telegraph that he understands that people need to love their tools. For example, the long awaited delivery of MS Office for the iPad was a good move, but it should have happened much sooner.
In the meantime, my opinion is that so long as Microsoft focuses on the positive prospects of wealth creation and business success by its customers, continues its emphasis on the security of its products, and places that vision front and center, the company has prospects can at least mimic Apple's.
However, many things can still go wrong, and all of Microsoft's competitors have proved to be nimble and shrewd -- as Rocco Pendola has pointed out. Success is still far from certain.
At the time of publication, the author was long AAPL, although positions may change at any time.
This article represents the opinion of a contributor and not necessarily that of TheStreet or its editorial staff.
TheStreet Ratings team rates MICROSOFT CORP as a Buy with a ratings score of A-. TheStreet Ratings Team has this to say about their recommendation:
"We rate MICROSOFT CORP (MSFT) a BUY. This is based on the convergence of positive investment measures, which should help this stock outperform the majority of stocks that we rate. The company's strengths can be seen in multiple areas, such as its revenue growth, largely solid financial position with reasonable debt levels by most measures, solid stock price performance, reasonable valuation levels and good cash flow from operations. We feel these strengths outweigh the fact that the company has had sub par growth in net income."
Highlights from the analysis by TheStreet Ratings Team goes as follows:
- MSFT's revenue growth has slightly outpaced the industry average of 10.5%. Since the same quarter one year prior, revenues rose by 15.6%. This growth in revenue does not appear to have trickled down to the company's bottom line, displayed by a decline in earnings per share.
- MSFT's debt-to-equity ratio is very low at 0.25 and is currently below that of the industry average, implying that there has been very successful management of debt levels. To add to this, MSFT has a quick ratio of 2.31, which demonstrates the ability of the company to cover short-term liquidity needs.
- Compared to its closing price of one year ago, MSFT's share price has jumped by 38.92%, exceeding the performance of the broader market during that same time frame. Regarding the stock's future course, although almost any stock can fall in a broad market decline, MSFT should continue to move higher despite the fact that it has already enjoyed a very nice gain in the past year.
- Net operating cash flow has significantly increased by 61.17% to $9,514.00 million when compared to the same quarter last year. The firm also exceeded the industry average cash flow growth rate of 39.30%.
- You can view the full analysis from the report here: MSFT Ratings Report