Microsoft (MSFT) is looking to appoint its next CEO by the end of this year to replace Steve Ballmer, as he plans to retire in the next 10 months. One of the favorites for this position is Stephen Elop, presently the CEO of Nokia. According to reports, if appointed as CEO at Microsoft, Elop would move to divest the Bing and Xbox business, despite being Microsoft's high revenue contributing streams.
XBox, Bing Exit - The Stephen Elop possibility
Unveiled in 2009, Bing has been a pain point for Microsoft. It faces tough competition from Google (GOOG)'s search engine, which has a market share of 66% in the search engine segment, while Bing takes second place with 17% market share. In the third position, Yahoo! adds in additional 11.4% market share for Bing, bringing the total to about 29%. To date, Microsoft has spent billions on research and development for this search engine, affecting its margins and leading to cumulative losses that are estimated between $11 billion to $17 billion since its inception.
On the other side, the Xbox business has shown good but not impressive results when considering the margin side of the statements. Last month, the gaming console lost its number one position in the U.S. market in terms of monthly sales to Sony's PlayStation 3, which unseated Xbox after 32 months of the latter holding the leader position. Still, both consoles, PS3 and Xbox 360, crossed the 80 million unit mark in total sales as of October this year.
Since Sony's (SNE) PS4 is set to launch earlier than XBox One, it has comparatively gained quicker and larger popularity on the web. On the specs side, the PS4 has a better GPU speed, which clocks in 1.84 teraflops per second, while the Xbox One is said to have a GPU with a clock speed of 1.31 teraflops per second. Also, the RAM on PS4 is the advanced DDR5, while the XBox One will have the DDR3 RAM. Overall, PS4 would seem to be well ahead of Xbox One, and better positioned for the key holiday season. Another important advantage for PS4 is the high price of Xbox One, which is priced $100 higher, and seemingly makes PS4 a more attractive buy. Due to these differences, IDC has predicted PS4 will top the Xbox One in terms of sales within the coming holiday season. PS4 has already sold 1 million units in the first 24 hours of its launch in the U.S. and Canada this month, showing its popularity. With a much wider roll out expected by the end of this month, I anticipate a much higher jump in these figures.
Removing these two businesses -- Bing and Xbox -- will potentially lead to earnings growth of 40% by the fiscal year 2015. This would seem to make it a profitable move for the company. On the other hand, Microsoft has already integrated Bing with its Windows 8.1 OS for desktops and mobile phones and aimed for deeper integration with new updates. In the case of Xbox One, Bing is said to power a few of its apps and features. Given that the Xbox One release date is just a few days away, I don't feel this strategy would be possible in the near term at least, as the Bing business still has significance in Microsoft's other products.
Google still reigning in most of its segments
Despite competition from Microsoft's Bing, Yahoo!, AOL, and Baidu, Google has managed to keep its Number one position intact in the search engine segment. However, the market share of Google's search engine has remained roughly flat on the year-over-year basis. What caught my attention here was the contribution from smartphones and tablets. Almost one-third of the clicks were from smartphones and tablets in the third quarter this year. One of the advantages of this growth is its Android operating system, which has a market share of about 81% worldwide, followed by Apple's (AAPL) iOS with 13.4% and Windows' 4.1%, as of October this year. Android's major OEM is Samsung with almost 25% share. Based on the sales of smartphones manufactured by Samsung, Sony, LG, and Motorola, I believe Google's Android operating system will continue to be the market leader, at least in the coming few years. Additionally, Google benefited from the increase in paid clicks, which increased by 26% year over year in the third quarter this year. With such a high market share in the operating system market, I expect Google to continue experiencing similar growth in ad revenue in the coming quarters. Overall, the smartphone sales, which make Google's Android OS the market leader, make me believe that Google's search engine will continue its No.1 position in the long run.
Windows Mobile believes in 'slow-steady-wins' theory
In the long-term, I expect Windows phones to give stiff competition to the Android and iOS phones. Windows phone sales have almost doubled when compared to the previous quarter, despite the existence of the two mature operating systems. Its marketplace reflects this growth. It posted 1.7 million daily app downloads in October this year. This was almost 38% higher than downloads in June this year. Recently, the video-sharing Vine app launched its application for Windows mobile. Also, Instagram, a photo-sharing app, is expected to launch its integrated application for the operating system in the coming days. This shows the growing popularity of the Windows operating system, which will bring in more customers in the future.
Windows Mobile Marketplace Download Data
October | June | February | |
Paid | 1355593 | 1036456 | 1046896 |
Free | 49796691 | 35880344 | 34604172 |
Total | 51152284 | 36916800 | 35651068 |
Daily Average: | 1705076.13 | 1230560 | 1188368.93 |
Source: Tech Crunch
Given the success of Nokia Lumia 520 and Nokia Lumia 720, Nokia, the biggest Windows OEM, further increased its product list by launching a tablet named Lumia 2520, a high end smartphone Lumia 1520, and a mid-range smartphone Lumia 1320 last month. This platform has shown such immense progress that, as per the Gartner report, Windows is expected to surpass Apple's iOS and be second biggest mobile operating system by 2015. It has already overtaken Apple in Italy, India, and the Latin American region too. Since Microsoft has acquired Nokia, it will be one of its biggest revenue streams in the long run.
Valuation Checkpoint
In order to assess the valuations, I compared Microsoft with its mobile platform competitors Apple and Google. The price to sales, or PS, ratio of Microsoft, Apple, and Google are 3.92%, 2.74%, 5.92% respectively on the trailing 12-month basis. The most impressive here is Apple with the lowest PS ratio. Apple posted improved results in the third quarter this year, bringing its trailing 12-month revenue to almost $171 billion. It has sold over 33 million iPhones and nearly 14 million iPads in the same quarter.
Microsoft hasn't returned to the $20 billion revenue levels it had in the first quarter this year. Still, it managed to show year-over-year improvement in its most recent quarter. It has a much better valuation when compared to Google, which has the highest PS ratio among the discussed companies. 
In the year-to-date period, Microsoft's stock price has performed well, growing almost 40%. Given the possibility of selling off the Xbox and Bing businesses, margins could see a positive impact. This will help Microsoft re-invest in R&D in the future, so it can compete with Android and iOS. Overall, there don't appear to any major headwinds poised against the company in the long run, making it an investor-friendly stock.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article. (More...)
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