Shares of the software giant soared 7 percent on Friday on news that it would be replacing Ballmer as CEO within the next 12 months. The market's opinion of the news must sting Ballmer (though it also made him a few hundred million dollars richer), but investors expecting that Microsoft's next leader will be able to return the company to its former glory may be in for a rude awakening.
Why would consumers and businesses want to return to a time when they were dependent on a stodgy operating system that was expensive and slow to adapt? What if Microsoft doesn't find the right CEO? What if there is no such thing as the right CEO?
Those are just a few of the heavy questions that Microsoft's stockholders face in light of Ballmer's pending departure, and they may not like the answers.
You Can't Go Home Again
First, let's talk fundamentals. Does Microsoft's business make it a good buy for forward-thinking investors?
Well, in the past dozen years, Microsoft has gone from being the world's most valuable company to one that is worth less than two-thirds of what current leader Apple (AAPL) is today. Microsoft and Google (GOOG) commanded nearly identical $290 billion market caps at the kick off of this trading week, and the search engine giant wasn't even publicly traded when Ballmer was tapped to be Microsoft's CEO in 2000. In fact, Google had only been founded 16 months earlier.
Tech babies grow so fast these days.
And that, at least in part, is the root of Microsoft's problems. Computing hasn't merely evolved -- it has metamorphosed. Consumers aren't buying PCs like they used to. Desktop and laptop sales have fallen sharply for five consecutive quarters, which has never happened before. That's not a lull. That's not a bad stretch. That's a trend.
And it isn't just a Windows woe. Apple's Mac sales have also been sliding in recent quarters.
Most PC buyers never needed the full processing power their machines had under the hood, and that's even more true today. A large percentage of us just want to surf the Web, check email, and stream media.
Those are painful shifts for Microsoft: Its two primary cash cows are its Windows operating system and its Office productivity suite. Windows has only managed to claw out a 4 percent share of the market in smartphones and tablets, and that's after throwing billions of dollars at mobile computing.
Google's Android has become the operating system of choice for smartphone and tablet users, and Apple's iOS is a distant second worldwide. That leaves Microsoft with a nearly insurmountable amount of ground to make up, even assuming it can figure out how to compete with the freely available open-source Android. Microsoft used to command premium prices for its Windows updates; soon, it may not even be able to give them away.
The outlook for Microsoft Office is a bit more secure, largely because Google's competing cloud-based software hasn't exactly stormed the market -- yet. However, it's really just a matter of time before the productivity business succumbs to the allure of free, cloud-based applications.
The Good News
And yes, there is some good news. Microsoft is still growing despite the headwinds. Server and tools software products continue to sell briskly. Microsoft's Xbox 360 has been the country's top gaming console for months, and after a few initial missteps, excitement is building for November's debut of Xbox One. Bing has been able to hold its own in search, fortified by a deal struck with Yahoo (YHOO) to handle the dot-com pioneer's search business.
Microsoft is growing overall, and analysts see revenue and earnings per share climbing in the 4 percent to 6 percent range in fiscal 2014. The tech bellwether isn't reeling, but it's certainly not growing fast enough to satisfy today's growth stock investors.
Meet the New Boss ...
Finally, let's talk leadership.
We can safely assume that Microsoft won't hire its next CEO from the inside. Promoting from within is often a smart move, but investors didn't send Microsoft's stock $20 billion higher in value because they hoped Ballmer was going to be replaced by someone already helping call the shots in Redmond. Microsoft is going to need a seasoned outsider with a big name, and don't be surprised if it's a former Google or Apple executive.
Hiring Google execs has worked well for many of the Internet's meandering companies. Yahoo shares have nearly doubled in value since ex-Googler Marissa Mayer took over 13 months ago. Facebook (FB) certainly hasn't suffered since Sheryl Sandberg stepped in as COO.
Then we have Apple. Executives from the iEverything company used to be untouchable, but a slumping share price since last October's iPhone 5 release and a corporate shake-up shortly after that could drive a big name from Apple to accept the Microsoft challenge.
So Microsoft may actually wind up with a name that the market likes, which could give it a short-term bounce -- but that still doesn't mean that you buy Microsoft here. No matter who is running the show, its attempted transformation from a software dynamo into a tech firm that specializes in products and services will be long, expensive, and likely unsuccessful.
Microsoft isn't going away: It has far too much money. However, it hasn't been able to buy or build its way into relevance in the markets that are growing. The ultimate question for investors here is, will Microsoft will be more relevant in five years than it is now? You can hope for a transformational figure as its next CEO, but deep down inside, you know the answer.
Motley Fool contributor Rick Munarriz has no position in any stocks mentioned. The Motley Fool recommends Apple, Facebook, Google, and Yahoo!. The Motley Fool owns shares of Apple, Facebook, Google, and Microsoft. Try any of our Foolish newsletter services free for 30 days.