FBR Capital Markets downgraded Microsoft Corp.'s stock Monday morning, citing slowing PC sales to large businesses, as well as strong competition in the tablet market. The downgrade came on the same day that Microsoft's departing chief software architect issued an internal memo, inviting staffers to imagine a "post-PC world."
THE SPARK: Although Microsoft recently announced the availability of 11 phones running its new Windows 7 smartphone software, which has garnered positive early reviews, last week's news that chief software architect Ray Ozzie has resigned may have struck investors as ominous. The long-time employee was so dear to Microsoft, that CEO Steve Ballmer has said the company will not attempt to replace him.
Also on Monday morning, Ozzie released an internal memo, outlining opportunities that "are yet to be realized" and predicting an era in which computing will revolve around websites more than PCs, Microsoft's bread and butter. Meanwhile, Web-based services is an area where the company has lagged, particularly compared with competitors such as Google Inc.
THE BIG PICTURE: With its Windows operating system installed on about 90 percent of computers worldwide, Microsoft has a stronghold over the PC market. However, as people do more of their computing on the Internet, and with the help of mobile devices such as phones and tablets, Microsoft's dominance in the computer industry could become less relevant.
THE ANALYSIS: This morning, FBR Capital Markets downgraded Microsoft's stock to "Market Perform" from "Outperform," citing slowing PC sales to large businesses, as well as the potential for tablets, such as Apple Inc.'s iPad, to cannibalize PC sales. David M. Hilal, CFA for FBR, says that sales of PCs to large businesses are slowing, and that meanwhile Microsoft has dawdled in entering rapidly growing markets, such as tablets and consumer smartphones.
"Gone are the days when Microsoft could be late to market, but through immense resources, catch up and be relevant," he said.
He also suggested that Microsoft's competitors are stronger than they once were, and have had enough of a head start in these categories that Microsoft will struggle to catch up if it continues to proceed with such caution.
SHARE ACTION: Microsoft stock fell 10 cents to $25.28 in morning trading.