Its no secret, Microsoft Corp. (NASDAQ:MSFT) has been left in the dust by Google (NASDAQ:GOOG) and Apple Inc. (NASDAQ:AAPL). In the past year, the NASDAQ increased 11% while Microsoft (MSFT) shares have declined 16%.  That’s another sign the Windows-fueled company is no longer the technology market leader. Over the past five years Apple’s (AAPL) share price has increased more than 400% and Google (GOOG) has jumped 65%. Microsoft has been dead money during the same time frame, moving down 9.8% since 2006.

HOW LOW CAN YOU GO?

Microsoft (MSFT), NASDAQ, S&P 500 12 months performance

Wall Street isn’t convinced Microsoft can continue raking in revenue. Will consumers continue to buy the company’s flagship Office and Windows products when Google and others are offering competing cloud software for free? Last week Piper Jaffray (PJC) reiterated its “outperform” rating on Microsoft  with a $25 price target on the stock. Today, shares of Microsoft are trading just under $25 meaning Piper expects the stock to do nothing for the next 12 months. Microsoft shares appear “cheap” to the naked eye. The company’s stocks trades with a P/E ratio of 10.51 and a dividend yield of 2.58%. However what good is a “cheap” stock if it fails to increase or, worse yet, declines in value?

Microsoft shares haven’t been over $32 since winter of 2007 and before that it was 2001. The 200-day moving average for Microsoft is $26.34 a share. Microsoft’s 52-week high of $31.58 was set back in April 2010. During the past 12 months Microsoft shares spent more than half the year trading under its 200-day moving average. In the past month volatility has pushed down Microsoft shares 8.3% and they now rest 8.35% away from its 52-week low. Microsoft’s one year chart speaks for itself. The poor performance of Microsoft’s stock is blatantly apparent when compared to the NASDAQ and S&P 500 over the past 12 months. Its dead money.

THE WINNING PARTS OF MICROSOFT

Microsoft and its venture into the Cloud

Microsoft, as Charlie Sheen would say is “winning” when it comes to its Kinect / XBOX 360 and Cloud Computing products.

When it comes to the “Cloud”, Microsoft is at the forefront along with Google and Amazon.com (AMZN). This month labeled the three tech titians the “cloudpeople”:

The cloudpeople suggest a daring complement to the cost-cutting: Adopt the rapid-prototyping, beta-testing lifestyle of the new era. Relinquish control of your technology infrastructure—you don’t need it anymore. Let employees toss out new services and see what sticks. Innovate with impunity. “In the cloud,” says Tony Scott, CIO of Microsoft, “there’s no penalty for guessing wrong.”

However the cloudpeople at Microsoft aren’t expecting a return on investment anytime soon. Last year, the company said it would take two to three years before their cloud products produced any revenue.

Microsoft is enjoying success with Kinect. Kinect is a virtual hands-free add on to the XBOX 360. Kinect passed the 10 million sale milestone and in record time. Digitaltrends.com, the Guinness Book of World Records awarded the Kinect “The Fastest Selling Consumer Electronics Device.” Kinect sold faster than Apple’s iPad and iPhone. Consumers have fallen in love with Kinect and within the first sixty days they sold over eight million units.

Then there is Microsoft’s Windows Phone 7 that Nokia will start using in 2012 or earlier. Microsoft reportedly paid Nokia (NYSE:NOK) $1 billion to adopt Windows Phone 7. You can do that when you have $40 billion of cash lying around and don’t want to increase the dividend. Microsoft has put plenty of its cash to waste, remember that cellphone they launched then pulled just weeks later. I wonder how much money they have poured into Zune, its  iPod wannabe device and store?

SHOW ME THE MONEY

Microsoft continues to bring in revenue like nobody’s business and no longer provides a guidance. In January the company reported a record Q2 result raking in $19.95 billion in revenue. After all the bills were paid Microsoft’s Q2 2011 net income totaled $6.64 billion, or 77 cents a share.

Q2 2011 Revenue by Division:

– Windows & Windows Live: $5.056 billion, down from $7.193 billion a year earlier.

– Server & Tools: $4.39 billion, up 10% from $3.978 billion a year earlier.

– Business: $6.032 billion, up 24% from $4.864 billion a year earlier.

– Online Services Business: $691 million, up 19% from $579 million a year earlier.

– Entertainment & Devices: $3.698 billion, up 56% from $2.381 billion a year earlier.

Q2 2011 Income by Division

– Windows & Windows Live: $3.251 billion, down from $5.417 billion a year earlier (20% growth when adding deferral).

– Server & Tools: $1.776 billion, from $1.464 billion a year earlier.

– Business: $3.965 billion, up from $2.947 billion a year earlier.

– Online Services Business: Loss of $543 million, up from $463 million loss a year earlier.

– Entertainment & Devices: $679 million, up $365 million a year earlier.

The XBOX 360, XBOX Live, Kinect and now dead Zune (closed down this month) are part of the Entertainment & Devices division. Microsoft’s “cloudpeople” which are responsible for the Office 365, Windows Azure, Windows Server Hyper-V are spread across their Server & Tools and Business divisions. The Online Services Business (consisting of Bing, MSN, and advertiser & publisher tools) lost more than half a billion dollars.

Not every part of Microsoft is “winning” and that’s the issue when you buy shares in the company. Windows Phone 7 and Office 365 are catchup ideas to Google’s Android and Google Docs. The Kinect is a hot item. Microsoft is finally embracing creativity by supporting the hacks of the Kinect that have included self-steering robots, remote surgery systems, cheap 3D-video cameras, gesture-based games, a psychedelic music video and even crude Princess Leia holograms. However Bing.com that represents 4.3% of search versus Google’s 89.94%. When it comes to search Microsoft’s efforts are nothing more than a flea on a dog (a very expensive flea). Microsoft will continue to bring in revenue but at what percentage of growth? Until Microsoft’s new and innovative ideas turn into money-making products shareholders have to “wait and see”.

Bottom line: Microsoft’s share price is attractive under $25. However the company has not proved to Wall Street it can compete with the likes of Apple or Google.

Frank Lara Jr

The author has no positions in any of the securities mentioned in this publication.

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