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Weekly Contrarian: Microsoft Corporation (MSFT) Weighed Down by Consumer Efforts

MSFT's smartphone, tablet offerings not enough to compete

by 3/20/2013 1:14:18 PM
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This week, tech/finance columnist Mark Veverka wrote a piece for USA Today that called Microsoft Corporation (NASDAQ:MSFT - 28.38) on the carpet for its lagging performance with smartphones and tablets.

"I don't know many people who own a Windows phone or have bought a Windows tablet lately," wrote Veverka, while also praising Microsoft's latest operating system and software, and its ability to churn out profits from business customers. "That's a problem ... investors loathe the risk attached to the company's efforts to compete in consumer businesses, and they detest the billions lost in Internet services in recent years."

Veverka reasons that investors should view Microsoft as a business-oriented stock and not like a Google Inc (NASDAQ:GOOG), Facebook Inc (NASDAQ:FB) or even Apple Inc. (NASDAQ:AAPL). But he acknowledges that that MSFT will not stop its consumer efforts any time soon, even though those will continue to be a drag on the company's resources -- and profits.

"Microsoft is still a tremendous technology company, but it has matured into an industrial conglomerate that is restrained by its own Windows-centric culture," Veverka concludes.

Contrarian Perspective

Microsoft has indeed tried to grab a slice of the consumer phone/tablet market recently with huge marketing campaigns and the launch of (expensive) consumer stores in malls across America. But while MSFT products have received good reviews, they haven't garnered nearly the attention made by Apple when a new iPhone or iPad is unveiled, or even when Samsung or Research In Motion (NASDAQ:BBRY) recently unveiled their new phones. And according to one report, Apple's iPhone and Google's Android operating system accounted for 91% of all phone shipments in the fourth quarter of 2012, and there appear to be few cracks in that castle.

Technically, Microsoft shares took a big dive in mid-November and bumped along near annual lows until a minor 6% gain in recent weeks. Still, MSFT is trading well below its 80-week moving average, which has been clearly providing resistance since November. And Microsoft narrowly beat analysts' earnings expectations last quarter, but missed in the quarter before that. Another miss in April could pull the stock back down.

From a contrarian point of view, the sentiment from the option crowd may be overly bullish, providing another area of potential weakness. The Schaeffer's put/call open interest ratio (SOIR) for MSFT stands at 0.46, and that is at an annual low, meaning that call open interest among options that expire in three months or less is as high as it has been in the last 12 months as compared with put open interest. And Microsoft's 50-day call/put ratio on the International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX) is 2.52, which is in the top 22% of readings in the last year. That means traders are buying calls to open more frequently recently. Combine these two indicators and it could mean that confidence in the stock -- at least in the option markets -- is overly high.

In short, the columnist makes a fair assertion that all of the efforts to compete with Google and Apple for consumers could continue to be a drag on earnings, and options indicators show the stock could be up against some contrarian headwinds.

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