GOOG Q1 / MSFT Q3 – Have and Have not

Google looks steady while Microsoft continues to chase its own tail.

• Sift through the details of Google and Microsoft’s earnings announcements and you will see clear signs of the old and the new.
• How consumers interact with machines and the internet is radically changing and Microsoft is struggling to remain relevant in that segment.
• Google reported revenues / EPS that beat expectations with $11.0bn / $11.58 compared to forecasts of $11.2bn / $10.68.
• The EPS beat was mostly due to a one time R&D tax credit.  
• Motorola Mobility was once again a thorn in the side of shareholders with another thumping loss of $179m (-18% EBIT margin).
• Microsoft defied gravity with enterprise and server software making up for the slump in consumer.
• Microsoft reported revenues / EPS of $20.5bn / $0.72 compared to forecasts of $20.5bn / $0.68.
• Good cost control allowed margins to expand producing the better than expected EPS.
• The Windows division was weak with revenues of $5.7bn compared to forecasts of $5.9bn but clearly the market was braced for worse given the 14% Q1 decline in PC shipments.
• Essentially, 25% of PC users have no real need of an advanced operating system as they only use the PC to browse, communicate and consume content.
• It is this 25% abandoning the PC that is causing the much weaker than expected PC sales.
• It is Android and iOS that are picking up the majority of these users and given a 4-5 year replacement cycle for PCs, I would expect this weakness to continue for a while yet.
• The remaining 75% are content creators and I do not think that they are likely to abandon Microsoft.
• However, many of them (including me) are finding that Windows 7 is plenty good enough for their needs and see no reason to upgrade yet.
• This is where the Microsoft marketing machine needs to be woken from its stupor of “build it and they will come” because it has been built but no one has turned up.
• These users need to be shown what Windows 8 really has to offer because right now they seem to have no clue.
• Users with no clue will not be buying Windows 8. They will either stick with Windows 7 or go for iOS and Android.
• Rapid prosecution of this problem could stop the rot and prevent some of the 25% from deserting Windows but at the moment Microsoft is showing neither the will nor the ability to do anything about it.
• Google, on the other hand, is well placed and is actively investing in its services to keep users inside its ecosystem.
• It knows what it wants, where it is going and how to get there.
• The result is likely to be further steady growth in advertising revenues as well as user numbers in the Android ecosystem.
• This is why Google is on 16.7x 2013 PER and Microsoft is on 10.4x 2013 PER and I see no reason for this to change anytime soon.