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Microsoft Corp.'s ham-handed history of product innovation, combined with a steadily-shrinking personal computer industry, means any investment in the company's stock is likely to be dead money at best.
Microsoft remains dependent on the personal computer (PC) market with Windows and Office software accounting for 57 per cent of revenue and almost all of the company's operating income.
Unfortunately, the size of the PC market is declining rapidly. Technology consulting group Gartner Inc. released data earlier this week showing personal computer sales lower by 11.2 per cent year over year, and down 10.8 per cent quarter-to-quarter (relative to the already weak five year average seasonal decline of 7.5 per cent).
Goldman Sachs analyst Heather Bellini responded by lowering her rating on Microsoft to Sell while maintaining her $27 target price which indicates no expected returns for investors in the stock.
The growth of mobile devices and the subsequent decline of personal computers is apparent in Microsoft's anemic growth over the past number of years. Growth in operating income, a measure of core profitability, is now barely above the rate of inflation at 5.2 per cent per year. (see chart)
For the past decade, Microsoft's attempts to diversify out of the PC software and business computing have been largely unsuccessful (the Bing Internet search engine) and occasionally embarrassing (the Zune music player). Microsoft is a major player in gaming consoles but at 1.34 per cent of operating income, the Xbox has not grown sufficiently to affect overall corporate results.
True to form, Microsoft is now attempting to break into market segments – smartphones and tablets – already controlled by Apple Inc., Samsung and others. Given the precedents, success is in no way assured.
It's odd to talk about a company struggling when expectations are for revenues above $80-billion (U.S.) in 2013. But with the PC market shrinking, growth will be difficult to come by until they can establish a foothold in faster growing technology segments like mobile devices or cloud computing. History suggests their efforts will be unsuccessful and investors searching for profit growth should look elsewhere.
Scott Barlow is a contributor to ROB Insight, the business commentary service available to Globe Unlimited subscribers. Click here to read more of his Insights, and follow Scott on Twitter at @SBarlow_ROB.