There was a time when analysts or cocktail party napkin passers would describe a company as "the next Microsoft" -- and they meant it as a compliment.
That was a decade or so ago, when computers and paperclip assistants mattered and Microsoft (MSFT) ruled the roost by cranking out the operating system of choice in the PC world.
We all know how Bill Gates and his Redmond cronies made Microsoft the anointed navigator of the computing realm: As box makers struggled with the low-margin nature of selling bulky hardware at cutthroat prices, Microsoft was there to cash in on the high-margin software end. The company shooed away the pioneers of Web browsers, word processing, and spreadsheets by shoehorning its own Internet Explorer, Word, and Excel into new computers.
Everything was great -- until it wasn't anymore.
If You Had Invested in Microsoft 11 Years Ago, Today You'd Have...
Eleven years ago nearly to the day, the software giant's stock closed at $27.43 -- adjusted for all of the splits, dividends, and distributions along the way. The stock is trading just shy of that mark right now, making it the poster child for what some investors are calling "the lost decade."
Not every stock has been stuck on flypaper this side of the millennium. Apple (AAPL) has seen its shares pop 12-fold in that time.
To be fair, Microsoft's fundamentals have improved over the years. It is making more money than it was during the frothy dot-com bubble days. However, slower growth and iffy prospects are keeping investors from paying the kind of multiples they were willing to pay when Mr. Softy was at the top of its game.
What's so lamentable about the company behind Windows, Bing, and Microsoft Office these days? You don't have to go back very far to see where Microsoft went wrong.
What Went Wrong, In Reverse
Let's start with its latest quarter.
Things may look rosy on the surface. Revenue climbed by just 8%, but earnings soared by a better-than-expected 30%. Unfortunately, the bottom-line pop wasn't a case of widening margins or a dramatic turnaround in its profitless online business. A huge reduction in its provision for income taxes is at the heart of the illusion. The more telling operating profit inched just 4% higher.
Windows 7 may have avoided the critical lashings of Vista before it, but consumers aren't convinced. Revenue and operating profits actually declined in that division, leading the company to begin hyping up the prospects of Windows 8.
Don't hold your breath for some magical resurgence. U.S. PC shipments fell by 10.7% in the first quarter and a still worrisome 4.2% during the second quarter, according to industry tracker IDC. Back out the Windows-less Apple that's gaining market share and the numbers look worse for Microsoft-fueled systems.
"It's not you, it's me."
Consumers have become everything that Microsoft didn't want us to become.
- We rely on cloud computing, so we no longer need to update our PCs as often in a server-stored world.
- We've become complacent with "good enough" computing through smartphones and tablets where Microsoft is far behind Apple's iOS and Google's (GOOG) Android as the operating systems of choice.
- We're stuck in our ways, but that doesn't deter Microsoft from spending money to try to make money. It's paying billions to Nokia (NOK) to promote its mobile operating system, just as it will be paying billions to Yahoo! (YHOO) to make Bing more popular (the jury's still out on that one). It seems almost impossible for it to catch up with Apple and Google in mobile through a fading Nokia.
- We can be wooed by free stuff. Office is holding up better with its recent update, but it's going to be hard to compete on the cloud when Sun and Google are giving their alternatives away.
There is still strength for Microsoft when it comes to server software -- the one silver lining in the cloud computing revolution -- but it's not going to be enough to carry this $220 billion company.
Thinking Outside the Xbox
The only two divisions that we have left to cover are the company's fastest growing, but they're also the biggest financial drains.
Things are looking better on the gaming front, but Microsoft is barely profitable there despite selling a ton of Xbox 360 consoles and Kinect controllers and collecting juicy software royalties.
Add it all up and you get a great company in a horrible situation. Google is finally succeeding in championing free operating systems, with Apple cleaning up on the other end. Barring something miraculous, Microsoft's relevance will continue to fade with every passing year. The "good enough" computing revolution is "bad enough" for Microsoft.
Think about it. The next time you hear someone call a company "the next Microsoft," it won't be a compliment.
Longtime Motley Fool contributor Rick Munarriz does not owns shares in any of the stocks in this article. The Motley Fool owns shares of Yahoo!, Google, Apple, and Microsoft. Motley Fool newsletter services have recommended buying shares of Microsoft, Apple, Google, and Yahoo!.