The Windows 8 Flop: What Does it Mean for Microsoft?

windows-8-logoWindows 8 was the revolution that wasn’t.  But don’t count Microsoft (Nasdaq:$MSFT) out just yet.  In a lot of ways, the boring, button-down software giant was just a little ahead of its time.

After a storm of criticism from frustrated long-time Windows users, Microsoft announced that it would be making significant changes to its Windows 8 operating system.  The details have not been released yet, but it’s assumed that they will include bringing back the “Start” button that has been a fixture in the lower-left corner since 1995 and giving desktop users the ability to bypass the tiled start screen on system startup.

Is this a failure for Microsoft?  In some critical ways, yes.  In a classic case of arrogance, Microsoft assumed that, after some initial grumbling, consumers would embrace the Windows 8 style because, frankly, they weren’t given a choice.

Few companies can get away with something like that.  Arch-rival Apple (Nasdaq:$AAPL) can, or at least could under the Steve Jobs regime.  But Apple was a quirky exception in that its fans had an almost cult-like devotion to Jobs and would have likely drunk cyanide-laced Kool-Aid if he asked them to.  Jobs could have gotten away with something as jolting as Windows 8.  His replacement at Apple, Tim Cook, couldn’t get away it, and neither could Microsoft CEO Steve Ballmer.

A second flaw was failing to realize how conservative most Windows users are, particularly business users.  Window 8’s colorful tiled start screen is attractive and I have grown to like it.  But it is not appropriate for a stodgy business crowd that values efficiency and functionality.   I’m 35, and learning how to use Windows 8 was frustrating to me.  I can only imagine how much more frustrating it must be for a user in their 50s or 60s.

But here’s the thing.  It doesn’t matter.

This is why I love Microsoft.  They can have a fundamental screw-up like Windows 8 and still keep plugging along.

Steve Ballmer called the launching of Windows 8 a “bet the company” moment, but nothing could be further from the truth.   Microsoft’s “moats,” or competitive advantages, are so strong that it can survive and thrive even after making a major miscalculation like this.

My first experience with Windows 8 wasn’t particularly good, yet I subsequently bought two more PCs running the operating system.  Between home and office, I own three Windows 8 machines and may own a fourth before the end of the year.

Why?  Because I’m locked in.  I run my office—and my life—on Windows machines, and dealing with the frustration of Windows 8 is still less bad than trying to learn how to use a Mac or than paying the Mac premium.  And never mind all of the software and services I run that require a Windows machine.

And before we throw Windows 8 under the bus, there is actually quite a bit to like about the system.  It’s fantastic that Microsoft has an operating system that can run on both traditional PCs and laptops and on touch-screen devices like tablets and hybrids.   Having a common look and feel across devices is part of building the Microsoft brand for the next generation, and the tiled start screen actually works quite well on a touch screen.

After getting over the initial headache of learning something new, I actually like Windows 8 now.  I have all of my Windows 8 devices registered to the same Microsoft account and I save virtually all of my files on Microsoft’s SkyDrive cloud storage service.  Using this setup, I no longer have to lug a laptop around or use something clunky like a remote desktop client.  I can log into my Microsoft account from anywhere in the world and have instant access to my office.  For someone who travels as extensively as I do, that’s not a bad arrangement at all.

But there are still times when I would kill for a return to the Start button…

I’ve argued for months that tech is the new tobacco.”   And by this I mean that big technology giants—Microsoft chief among them—are currently priced for no growth and are evolving into dividend-focused cash cows.

If none of Microsoft’s growth initiative amount to much—if the new Xbox fails to impress, if Windows tablets never gain much market share, in the Windows Phone remains an also-ran, etc.—then Microsoft is still attractive as a cheap dividend payer with a massive hoard of cash and stable, if gently declining, businesses in operating systems, servers, and office productivity software.

And if Microsoft’s work pays off and any of these new initiatives wind up being a success, then Microsoft quickly becomes the buy of the decade.

Disclosures: Sizemore Capital is long MSFT.

Charles Lewis Sizemore, CFA, is chief investment officer of the investment firm Sizemore Capital Management and the author of the Sizemore Insights blog.

Charles Sizemore and Jeff Reeves Discuss the Microsoft Drubbing

From Jeff Reeves at The Slant:

It was a rough Thursday for PC stocks Microsoft (NASDAQ:MSFT), Intel(NASDAQ:INTC), Hewlett-Packard (NYSE:HPQ) and the like.

That’s because late Wednesday, IDC reported PC sales slid nearly 14% in the first quarter, well below the 7.7% decline that was expected and the worst drop since the firm began tracking the sector in 1994.


To add insult to injury, Microsoft was downgraded Thursday by Goldman Sachs(NYSE:GS), Normura and Hilliard Lyons. All  cited the ugly IDC numbers.

So what’s going on? Can these companies — particularly Microsoft — evolve?

Charles Sizemore thinks so, based on hopes of getting Microsoft Office software on Apple and Android devices.

The tug-of-war between hardware and software always favored keeping Office native to the Microsoft Surface tablet. But that may be changing.

“It’s a bit of a game in that does Microsoft … minimize their plans to grow their tablet business by pushing Office onto their competitors, or do they hold out and see if they can generate margins?”

Charles thinks the rumor mill is strongly favoring a push onto Apple (NASDAQ:AAPL) devices powered by iOS or mobile gadgets running Android from Google(NASDAQ:GOOG).

There’s also hope for the xBox business with innovative in-home entertainment options, Charles says.


Charles Lewis Sizemore, CFA, is chief investment officer of the investment firm Sizemore Capital Management and the author of the Sizemore Insights blog.

BlackBerry 10 Will Not Save RIMM

With a little more than a week to go before BB10 hits the stores, Research in Motion (Nasdaq:$RIMM) has become a hot stock again.  The company that invented the smartphone may be reestablishing itself as a major player in mobile.  Or, we could be watching the biggest dead-cat bounce in history.


As recently as this past September, RIMM was left for dead, trading for barely $6 per share.  As this article is going to press, it has nearly tripled from those levels.  A rally that large and over that long a stretch cannot be dismissed as short covering.  Clearly, a lot of investors believe that the BlackBerry is making a comeback.

We’ll see about that.

If you’re a nimble trader with a short time horizon, RIMM might be worth a gamble.  Given the current level of speculation in the stock, there should be some great trading opportunities over the next few weeks, long and short.

But if you’re an investor with a longer time horizon, you should view the rally in RIMM’s shares with a healthy dose of skepticism.  RIMM is not Apple (Nasdaq: $AAPL), Google (Nasdaq:$GOOG) or Microsoft (Nasdaq:$MSFT).    Any of these tech giants can afford to make a colossal mistake or two or to have a new product bomb.  Microsoft and Google have both proven this; with the exception of the Android operating system, neither company has come out with a hit product in years, yet both continue to generate gobs of cash.  Even the infallible Apple had its Maps public relations disaster last year, yet it hardly slowed the company down (stock price crater aside).

But RIMM?  For the erstwhile mobile leader, BB10 is do or die.  If the operating system fails to inspire consumers, then the company is finished.  This is a binary set of outcomes.  Either BB10 is a hit, and RIMM matters again, or it is a bomb and it is time to sell off the company’s assets and close up shop.  Given the competitiveness of the smartphone race, no prudent investor would make that bet.

Let’s pick apart some of the bullish arguments.

RIMM’s messaging and secure email system is a competitive advantage that keeps customers—and particularly enterprises—loyal.  Wrong.  I used to think I would miss my BlackBerry messenger and inbox…right up until I bought an Android.

But beyond this, one anecdotal bit of news late last year made me realize that BlackBerry was finished.  Fannie Mae—the quintessential enterprise customer with overzealous security requirements—was allowing their portfolio managers to turn in their company-issued BlackBerries and instead access their company email via their own iPhones and Androids using a custom app.

I had been skeptical that the “bring your own device” trend would ever expand beyond small businesses.  Big business and government would never tolerate the loss of control or security risks.  Well, never say never.  When government-sponsored entities allow it, it’s hard to imagine who won’t.

BB10’s new features are a “game changer.” Really?  Because everything I see looks a lot like something I’ve seen somewhere else.  The new BlackBerry Messenger (BBM) has voice calling, so you can call friends internationally from wifi or your data plan and not use mobile minute.

It seems like I’ve seen this before.  Oh yeah, it’s called Skype, and it’s already available on every other mobile platform except the BlackBerry.

Rumor has it that BB10 has the fastest browser.  Ok.  For lack of better information at the moment, I’ll concede that point.  But given that mobile devices tend to be app-driven and not browser-driven, that’s a small victory at best.

Rumor also has it that BB10 will have the best auto-correct and word prediction, which are valid selling points for a touchscreen phone.  But will that compel a customer to choose a BlackBerry over the newest, snazziest Samsung Galaxy?  I’m thinking no.

There is huge pent-up demand for the BB10 after months of delays.  This is laughable.  Yes, plenty of current BlackBerry users will upgrade.  But given the poor experience with the brand in recent years, I don’t see too many former users who defected to the iPhone or Android going back.  They’ve moved on, and whatever they found appealing about the BlackBerry ecosystem in the past—such as BBM, which is still the best texting program out there—they have found they can live without.

A related issue here is cost.   I was poking around the T-Mobile store a few weeks ago (shopping for a Windows phone, incidentally) when I picked up the current generation BlackBerry Bold.  Buying it outside of contract, it costs over $600.

Seriously?   $600…for the old, clunky non-BB10 edition?  What will a new one cost? For consumers to give BB10 a chance, it will have to be aggressively subsidized and pushed by the carriers.  Will they?  All major carriers have pledged “support.”  We’ll see what that means in practice.

RIMM’s share price is soaring today on comments from CEO Thorsten Heins that the company’s strategic review could include selling off its hardware production or licensing its software.  I argued a year ago that RIMM could have a bright future as a services company by building on Mobile Fusion.  It could essential follow the path of IBM and become a high-end services company rather than a gadget maker.

But a year later, it’s still nothing more than speculation. And with RIMM no longer dictating terms, carriers have started to push back on the licensing fees for BlackBerry Internet Service and Enterprise Server.

And who, pray tell, would buy RIMM’s hardware business?  Or more importantly, license BB10 as a manufacturer?  Samsung?  Nokia?  Probably not; both have made large commitments to Android and Windows.

RIMM doesn’t have a lot of time.  It’s bleeding cash, and it isn’t expected to turn a profit this year.  For RIMM, BB10 must be a rip-roaring success.  Failure means irrelevance and death.

And let’s not forget one last point.  RIMM is not really competing with Apple or Google right now.  It’s competing with Microsoft to be the third platform.

It is in everyone’s best interest to avoid an Apple-Google duopoly.  Consumers, manufacturers, and carriers all stand to benefit from more competition.  But I’m betting that it is Microsoft that pushes its way in, not Research in Motion.  Microsoft is starting with a clean slate and a fine operating system that any manufacturer can license.  There is no baggage and no cumbersome technology arrangements (think BIS and BES) with which to contend.

Samsung is set to launch its ATIV Windows phone (essentially a Galaxy that runs Windows instead of Android) in the United States about a week before BB10 hits the market.   We’ll see which ends up making a bigger splash.

I wouldn’t be too quick to short RIMM at the moment.  It’s simply too hot to touch.  But once the new release hype has run its course, RIMM could be an absolute feast for bears.

Disclosure: Sizemore Capital is long MSFT.

SUBSCRIBE to Sizemore Insights via e-mail today.

Beware the Crap Rally

The last few weeks have seen a rally in…well…for lack of better word, “crap.”

Before Tuesday’s correction, Research in Motion (Nasdaq: $RIMM) had risen 37% since just the beginning of this month and had nearly doubled from the low hit over the summer.

Facebook (Nasdaq: $FB), the company that may be remembered as the most disappointing IPO in decades, is up more than 36% in just the past two weeks.

Even Dell (Nasdaq: $DELL), the perpetually cheap PC maker that has struggled to stay relevant in the age of cheap Chinese competition and from upstart tablets and smartphones, has shown signs of life. The stock is up 13% in just the past week and a half.

What’s going on here?   Do investors really see value in these tech disappointments, or is this just the mother of all short-covering rallies?

It’s a little of both.  Let’s take a look at each company separately.

Research in Motion has been a real frustration to me as a former bull.  This was the company that invented the smartphone and as recently as a year ago could have remained the dominant player in the corporate market had they played their cards right.

Alas, they didn’t play their cards right.  In fact, they didn’t really play their cards at all.  For the life of me, I can’t figure out what the company has been doing for the past two years.  BB10—the new operating system that is supposed to compete with Apple’s (Nasdaq: $AAPL) iPhone and Google’s (Nasdaq: $GOOG) Android phones—is scheduled to be released in February of next year.  That’s almost a year later than originally planned, assuming they meet the deadline.  And given the company’s recent history, that is not a certainty.

You almost have to work to screw things up as badly as RIMM did.   Even after the company started to fall behind its rivals, it had assets of real value.  Its BBM messenger is still the best texting and instant messaging program on the market, and it could have been monetized as a standalone app for sale in the Apple and Google app stores.  But it wasn’t, and every day that passes it becomes less relevant as its pool of current users dwindles.

I still see value in RIMM’s Mobile Fusion platform, which allows corporate IT departments to manage iPhones and Androids on the equivalent of a BlackBerry Enterprise Server.  But there is a very significant risk that the company will fail before they have time to fully develop this.

RIMM still looks cheap—on paper.  It has roughly $2 billion in cash and an estimated billion or so in patents.  Backing these out, the value of RIMM as a going concern is currently only about $2-3 billion.  A good activist investor could buy RIMM, chop it into pieces, and sell off its parts at a profit.  But before that happens, management will probably destroy a lot more value first.

It’s simply too late for BB10 to save RIMM.  A year ago, I think it would have had a chance.  But at this point, the company has too much baggage, and they are fighting for turf among the business crowd with a resurgent Microsoft (Nasdaq: $MSFT). (See “Microsoft Will Crush Google“)

Don’t get drawn into RIMM.  It’s a sucker’s rally.

But what about Facebook?

My wife and I have a rule of thumb for technology products.  Once our respective mothers use it, it’s over.  This is not to say that the company is going out of business, but its high-growth phase is clearly over.  When our mothers are using it, there is no one left to join.

Well, both of our mothers are now avid Facebook users.

You should take my “Mother Indicator” with a grain of salt, of course.  But given that Facebook trades for 40 times next year’s expected earnings, my concerns about growth start looking valid.  Facebook’s profits would have to grow at torrid pace in the years ahead for that valuation to be anything short of ludicrous.

Zuckerberg & Co. are anything if not creative (“ruthless” is another word that comes to mind), and I have no doubt that Facebook will find new ways to monetize its assets.  But the company depends mostly on paid advertising, which is not a proven model yet in the world of social media.  And rival Twitter seems to be getting more buzz these days.

Facebook is a $50-billion company with a questionable business model trading at a nosebleed valuation.  If you buy it, you are betting big on Zuckerberg’s ability to innovate.  I’m not willing to make that bet at current prices.

Finally, let’s look at Dell.  Dell is a good company in a terrible industry.  They make good computers and laptops, but both are commoditized products.  There simply isn’t much premium to be charged for selling a “good” PC these days.  All of the profit goes to Microsoft, the maker of the operating system, and Intel (Nasdaq: $INTC), the maker of the processor.

That said, Dell is ridiculously cheap, even for a seller of a commoditized product.  It sells for just 6 times expected 2013 earnings and for just 0.29 times sales, and at $9.77 per share its price is barely above the crisis lows it hit during the 2008-2009  meltdown.

Dell also has no net debt, a respectable return on equity of 27%, and a dividend of 3.4%.

There is a lot of bearishness towards Dell for the same reason that there is a lot of bearishness towards Microsoft and Intel.  Computers are no longer a growth industry. While I consider them far from “dead,” tablets and smartphones are creeping deeper and deeper into territory once dominated by PCs.   Investors simply have no interest in owning shares of yesterday’s tech darling.

And herein lies a potential opportunity.  Dell is interesting contrarian value play.  If you believe, as I do, that there is plenty of room for PCs, tablets, and laptops on the desks and in the lives of most consumers, then Dell should have a viable future.  And given that no one—as in not a single investor I have met in years—has any interest in owning Dell right now, your downside should be tolerably low.

If sentiment improves even modestly towards PCs, Dell could be an easy double over the next 12-24 months.

Disclosures: Sizemore Capital is long MSFT and INTC.  This article first appeared on InvestorPlace.

Microsoft Will Crush Google

In recent weeks, I’ve written that Microsoft ($MSFT) will ultimately muscle-out Apple ($AAPL) as the leader in smartphones and tablets.  It will be a long war of attrition, but Apple has no durable long-term advantages—what Warren Buffett calls “moats”—to keep most of its customers loyal.  And Apple’s insistence on controlling every aspect of both its software and hardware puts it at a disadvantage to a more flexible Microsoft.  With Nokia ($NOK), Samsung, and other major manufacturers lining up to produce Windows phones, we will likely see a very different smartphone market a year from now. (To read the whole story, click here.  And to see what caused Nokia’s share price to jump 30% last week, see Nokia Lumia sells out in Germany.)

But what about Google’s ($GOOG) Android?

It may seem odd that Google gets barely a mention from me, given that the Android operating system dwarfs both Apple and Microsoft in market share.  By some estimates (it depends on what your threshold for “smartphone “ is), Android has over 75% of the market.  And I myself carry an Android phone.

If you want to know why I don’t take Google seriously as a long-term competitor, consider my recent experience with Google Play Music, which is Google’s (shoddy) attempt to compete with Apple’s iTunes. 

Google Play Music sounds great, in theory.  It offers you the ability to upload your entire music collection into the cloud and sync all of your mobile devices to one library and one set of playlists.  You can stream the songs over the internet or keep copies locally on your phone…or so I thought.

This is where I start to curse Google under my breath.  Google Play is incapable of syncing music to an SD card; it can only save your music to your phone’s internal memory.  That’s a problem when you have 32 gigs available on your SD card and less than 2 gigs in the phone’s internal storage.

This has been a “known issue” for over a year, and one that Google should seemingly be able to fix in a matter of hours.  Yet in order to get Google Play Music to use my SD card, I had to hack my phone with a jury-rigged scripting file.


You simply don’t have these sorts of problems with Apple or Microsoft.  Why?  Because they are real companies with real business models.  With a few exceptions, they actually charge for their products and offer some degree of support.

Given that Google gives most of its products away for free, you have to question how seriously they take them.  And given my experience with Play Music, the answer is “not very.”

I should be clear that I am not forecasting an immediate collapse in Google’s share price.  I simply have no way to gauge the sustainability of their advertising model, so I find it more prudent to invest elsewhere.

Disclosures: Sizemore Capital is long MSFT. This post first appeared on TraderPlanet

SUBSCRIBE to Sizemore Insights via e-mail today.