Why Microsoft's Stock Is At A Five-Year High - Business Insider

At first glance, things could not be going worse for Microsoft.

Its long-dreaded nightmare scenario is playing out. The PC industry as we've known it is collapsing. PC sales fell 14% in the first quarter, according to IDC, the worst ever drop in history.

Microsoft's new Windows 8 operating system is accelerating the collapse, says IDC. The new tile-interface is scaring consumers. Microsoft is scrambling to fix Windows 8 to address these concerns.

And even if Microsoft fixes Windows 8, it could be too late.

Its biggest rivals ? Apple and Google ? have taken complete control of the next major computing platforms. Apple owns tablet computing and a big chunk of smartphones. Google owns most of smartphones.

Microsoft is trying to make a dent in these markets but its being met with a wave of consumer indifference. It has 3.2% of the smartphone market and 3.7% of the tablet market.

Microsoft's normally listless stock has seen all of this terrible news and made a sharp move, soaring 26% this year, reaching a five-year high.

Wait. What?

That's right, Microsoft is trading just over $34 a share right now, despite the fact that the worst fears for the Windows franchise have been confirmed.

What gives?

For the longest time, the destruction of Windows has been hanging over Microsoft's head. Now that it's here, and really, it's not so bad, investors seem to feel better about the company.

Last quarter, Microsoft reported $18.8 billion in revenue, an 8% increase year-over-year. Its Windows division did $4.6 billion in revenue, which is about flat year-over-year. (These revenue numbers are non-GAAP. They exclude Windows upgrade revenues counted in the quarter.)

The Windows business is flat, despite the overall PC market falling, because Microsoft's Surface tablet, plus licenses to businesses made up for the shortfall. Microsoft's Windows business also isn't entirely tied to consumer PC sales anymore. It sells to corporations in multi-year deals.

The reason Microsoft's overall revenue grew is that it's now a diversified business. While CEO Steve Ballmer has regrettably repeatedly emphasized the importance of Microsoft's consumer businesses, the truth is that Servers and Tools, and the Business Division (home to the Office productivity suite) are driving Microsoft these days. Servers and Tools was up 11%. The Business Division was up 8%.

Earlier this year, Microsoft's stock got a nice boost when hedge fund ValueAct announced that it was going to invest $2 billion in Microsoft's stock.

ValueAct CEO Jeffery Ubben explained the investment by saying, "In three to five years, which is our time horizon, we?ll stop talking about PC cycles and instead talk about Microsoft as the largest cloud-computing company in the world."

A lot of funds have bought into Microsoft in the past and been burned. It's possible ValueAct will get burned, as well. It's also possible that this pop is a temporary blip for Microsoft.

But it looks like Microsoft is actually being increasingly viewed as a strong enterprise company with massive cash flow that can handle a weakening global PC market.

Turns out that, so far, anyway, Microsoft's nightmare scenario isn't that bad after all.

Source: http://www.businessinsider.com/why-microsofts-stock-is-at-a-five-year-high-2013-5

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