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Microsoft Doesn’t Belong in Your Portfolio

25 April 2008 One Comment

Microsoft (MSFT) just came out with their quarter, and they didn’t impress many investors. I don’t like Microsoft for the short-term or the long-term. Here’s why.

Over the short-term, companies are going to be spending less in this economic environment and doing their best to avoid the expensive upgrade to Vista and Office 2007. Like my company I work for, there is no reason for us to fork over the money to upgrade to another version of Microsoft software that doesn’t have that much to offer.

Over the long-term, there are several factors working against Microsoft. First, Microsoft is too focused on desktop software. The future is in computers that run light-weight operating systems to access web-based software. The trend towards internet based applications and open source development goes against
everything that is Microsoft Office. Microsoft is merely a big cash cow that is losing market share.

Second, Microsoft attempts to buy growth instead of focusing on internal innovation. While the $240 million they invested into Facebook is paltry compared to their cash reserves, it represents their philosophy to overpay for additional growth. Not only did the move put a value on Facebook in the neighborhood of $15 billion (which at its rumored profits creates a P/E multiple on Facebook of nearly 500), it doesn’t seem clear how they plan to leverage Facebook to ignite future growth. I believe social networking is a concept too big to be owned by a company such as Facebook or Myspace (I will explain further in a future post), but Microsoft seems desperate to get a piece of the hype.

Lastly, Microsoft seems wrapped up in its attempts to purchase Yahoo all the while Google continues to dominate the world of search and online advertising.

Stay away from Microsoft.

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