It was the second major technology "miss" Wall Street had to digest in the last week's time, coming after a disastrous earnings release by IBM Corp. (NYSE: IBM).
In view of both Microsoft and IBM's earnings difficulties, questions arose about whether the "Big Tech" sector is in trouble…
… And just as importantly, is "Mr. Softy" the victim of the tech sector's difficulties, or is it simply muddling through some tough times?
The answer is actually quite simple if you know how to read the most important signs in the two tech giants' earnings reports and invest accordingly.
Indeed, making the wrong move on Microsoft stock could cost you big long-term profits in the end…
Microsoft's Fortress of Strength Shows No Weakness
Microsoft's fourth-quarter operating performance was good but suffered from difficult comparisons with earlier periods, a strong dollar, and poor performance in regions like China, Russia, and Japan.
The company announced better-than-consensus revenue of $26.5 billion, while gross margin, operating income and fully diluted EPS were $16.3 billion, $7.8 billion, and $5.86 billion or $0.71 per share, respectively. All were roughly in line with Wall Street expectations.
The computing and gaming hardware segment did well, as Surface and Xbox One were big sellers during the holidays.
Meanwhile, the critical cloud segment shined, with commercial revenue growing by 114% year over year to $1.3 billion, the sixth consecutive quarter of triple-digit growth.
The performance was especially impressive considering that cloud revenue is now reaching 5% of overall sales and becoming a meaningful contributor.
Conversely, and as I mentioned in this article, IBM has seen serial sales declines across all of its products and in all geographic regions for the last couple of years. Even worse, it has borrowed more than $35 billion dollars to buy back an equal amount of overvalued stock, leaving its balance sheet heavily leveraged with a debt-to-equity ratio of 340%.
In fact, IBM has negative tangible book value of about $17 billion. Meanwhile, the stock has been the one of the worst performers on the Dow Jones Industrial Average for two years running and could match that feat again in 2015.
In contrast, while Microsoft has minor operating issues, it maintains a fortress balance sheet that is a long-term buffer against financial distress.
As of December 31, 2014, the company had $90.25 billion of cash and cash equivalents, long-term debt of $18.26 billion, and tangible book value of $62.725 billion (a sharp contrast to IBM's negative tangible net worth).
Like many tech companies, Microsoft pays a small dividend of $1.24 per share (2.6% dividend yield), and could pay much more. With a $350 billion market cap, Microsoft is one of the most highly valued companies in the world (its market cap is 2.3x IBM's).
Investors appear most concerned about whether the company's corporate software business is growing long in the tooth. Windows, Office, and Server products sales rose only 4.6% from a year earlier compared with 9.5% and 10.5% growth rates in the two prior quarters.
It is too early to tell whether this is a blip or the beginning of a trend.
The company will be wrestling with lower earnings estimates, the transition to Windows 10, some gross margins pressures coming from a changing product mix, and difficult comparisons to its corporate software business in the year ahead.
However, as Microsoft wrestles with the transition, it's clear they have an "ace in the hole" who's already shown the Street he's ready to do what it takes to keep it on the short list of tech superstars…
About the Author
Prominent money manager. Has built top-ranked credit and hedge funds, managed billions for institutional and high-net-worth clients. 29-year career.