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Why It's Time To Sell Microsoft

Tuesday - 8/27/2013, 6:23am  ET

Mister Market's pretty happy that Steve Ballmer is soon to be out the door. But truthfully, he hasn't been as bad of a CEO as Microsoft  investors and analysts want to think. It may seem that nothing good has come from Ballmer's time as Chief, that's not a fair assessment. However, it looks like it's time to sell. Let's talk about why you might want to do the same.

Microsoft today versus January 2000

Ballmer was given an impossible task: Take the reins of the most powerful tech company in the world from the man that started the company, very close to the peak of the market's insanity in January 2000, and return value to shareholders for the next decade or two. Well, that didn't happen:

MSFT Total Return Price Chart

MSFT Total Return Price data by YCharts

Despite poor returns from the market peak of 2000, Microsoft is larger and more profitable than it was when Ballmer took over:

MSFT EPS Diluted TTM Chart

MSFT EPS Diluted TTM data by YCharts

EPS and revenue have grown significantly over the past 13+ years. Share buybacks have reduced shares outstanding by more than 20%. Under Ballmer's leadership, Microsoft has invested heavily in the Entertainment segment, and with the Xbox One this will continue to to be a bright spot. So will the Data Center business, on increasing utilization of the cloud. 

Yes,Windows is losing relevance, and Microsoft has done horribly at mobile. But Ballmer is leaving a bigger and stronger Microsoft than the one he took over.

So what gives?

Bigger and stronger; but much more vulnerable. 

Competition and consumer sentiment are eroding Microsoft's relevance. If one looks to competitor Google , for example, we see a company which is leveraging the value of its leaders. From the 2012 annual report: :

If we were to lose the services of Larry, Sergey, Eric, or other key personnel, we may not be able to execute our business strategy. Our future success depends in a large part upon the continued service of key members of our senior management team. In particular, Larry Page and Sergey Brin are critical to the overall management of Google and the development of our technology ... they also play a key role in maintaining our culture and setting our strategic direction.

Think about this statement in comparison to what's happening with Microsoft shares. When a company's stock price goes up on the announcement of a leader's retirement, one could draw a line to a systemic problem with the company's culture and strategy. And I think that's the real problem with Microsoft.

So it's good that Ballmer's leaving?

Maybe. Maybe not. As the saying goes, "better the devil you know." But Microsoft's problems are about more than just leadership. This is a different world than 2000. 

Mobile has altered the way people think about computers. A few years ago, the average consumer would never install a free, open-source, Linux-based OS on their PC, even though Linux for the PC has been available for years. Consumers bought into the idea that you needed Windows. Google turned this notion on its ear with Android, and Microsoft's moat is crumbling. 

Consumers have overwhelmingly responded, buying more than a billion Android devices. Google then makes its money from the Google Play store, and its ubiquitous Search, which some have estimated Google to have 90% share of in mobile. And while not a direct correlation, Google's earnings per share has increased 158% since just after the commercial launch of Android in 2008. 

Simply put, consumers just don't see any benefit to buying a mobile device that says "Windows" on it, after decades of not really having a choice. 

The importance of culture

However, they will pay a premium for one that says Apple , as the company's recent quarterly report showed us with solid iPhone growth in the face of increased competition from Samsung. But Apple is in  a different place than Microsoft, despite also undergoing major leadership changes. 

Apple CEO Tim Cook is in a tougher position than Ballmer, as Jobs' death took him from us much too soon. However, Jobs' legacy will be as much about the culture of innovation that he instilled as CEO, as about his own vision. Cook has acted as a steward of that culture, staying within his own strengths as an operator, and putting people like designer Jony Ive in positions where their skills best serve the company's future.

While the record will show that Ballmer at times seemed to resent the legacy and shadow cast by Bill Gates, Tim Cook doesn't chafe at comparisons between himself and Steve Jobs. He knows his strengths and those of Apple's people, and isn't trying to shape Apple into his own image, and shares are up 55% since Cook took over in January 2011.

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