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Why a Cynic Is Suddenly Bullish on Microsoft

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With a portfolio including IE9, Bing, XBox 360, Kinect, and ASP.net, Microsoft is starting to do the right things. Plus, it's cheap compared to Apple.

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I have not exactly been a big fan of Microsoft over the past year or so (see A Cynical, Contrarian View on Microsoft). I didn't like the Skype acquistion. I haven't been very optimistic about Windows Mobile even though I think it's a good product (see Microsoft's Xerox Problem of Undervaluing Innovation). I've said Microsoft needed to focus on enterprise data, or "big data" as it were, and I said it needed to figure out some new and exciting things to do with its XBox platform.

Now I think Microsoft is doing some different things, things that, frankly, I didn't think it would do. Ever. In no particular order, here are five things that I see as evidence that Redmond is heeding Steve Jobs' advice and thinking differently:

1. The campaign to introduce IE9. Microsoft is calling IE9 "the browser you loved to hate." Clever way of capturing the zeitgeist, I must say. And as for the website you go to to download IE9, well, just look at it. It's on a Tumblr page. It uses YouTube videos and little, quirky infographic style posts to get its point across: That comebacks come in all shapes and sizes. The Microsoft of old would've made you go to www.microsoft.com/internetexplorer/ie9/whatever_other_directory_embedded_here just to find out about the browser. Plus, it would've been plastered with disclaimers about "Best viewed in Internet Explorer 8.x.x.xxx.xxxxx" and you would've needed 15 bazillion Microsoft Web-based plug-ins to do it all. Not anymore.

2. Licensing of Bing. Even though Google still dominates search, Microsoft has been looking at innovative ways to embed its Bing search engine in other products. For example, Toyota's (TM) new Entune in-car multimedia system uses Bing as its search engine so you can do mobile searches on the go from your car. This is the kind of move that Google (GOOG) used to make, but now we see Microsoft doing it. This is really the next evolution of Microsoft's strategy of putting its products in cars, as the Sync system has been available in Ford (F) vehicles for some time.

3. XBox 360 and Kinect. The game console has been a best-seller for Microsoft, but the development of applications around the platform would make the platform ubiquitous. Boeing (BA) is using it for creating virtual walk-throughs of its 737 jet, and hospitals are using the platform for navigating through CT scans. Between the in-house Kinect for Windows program and OpenKinect, an open source initiative designed to develop more applications for the XBox 360 Kinect platform in an open source framework, there are bound to be a plethora of applications developed that will make having the hardware essential. A software company looking to its hardware for revenue? Not exactly "inside the box" thinking from Microsoft.

4. Opening up ASP.Net and embracing Hadoop. This is somewhat arcane, but it's a big deal. Because way back when in the bad old days, Microsoft looked at the Web as something it needed to tame. Something it needed to control. Many who look to exert power in this way are, indeed, the most scared/threatened people in the room. And make no mistake: Microsoft used to be scared of the Web. But making its Web development framework ASP.Net open source is a complete shift in its approach. It's putting the framework out there and letting the community develop its own extensions with the hopes of the community helping Microsoft make its framework better. As for Hadoop, that's the open source framework the industry is moving to to handle "big data." If Microsoft didn't look to support Hadoop, it would've been seen as not listening to its customers and trying to do things the way it used to: develop its own standard and force it down its customers' throats. But embracing an open standard? And contributing its adaptions back to the Hadoop community for others to build on? Who are these folks and where is the company we know and hate?

5. Relative to Apple, the stock is cheap. I know that's pretty much a "duh" statement to make right now, but I want to show you just how cheap Microsoft is relative to Apple. Look at this weekly chart that looks at the number of Microsoft shares that can be bought with one share of Apple as of March 30:



It has been one relentless march higher in this ratio as Apple is leaving the rest of the market in its wake. Another way to look at this relationship is by looking at the distribution of Apple:Microsoft ratios to get a sense of where it has been and to see if recent experience is normal or not. Here's a histogram I made with five years of daily data for Apple and Microsoft, based on their closing prices:

Recent experience, where the ratio has been 16-18 times, is way out of the ordinary. The average ratio over the past five years is somewhere around 8.5 times.

Am I advocating a pairs trade where you go long Microsoft and short Apple? No. Trying to short Apple right now is like trying to keep a rocket ship tethered to its launch pad with rope. You're fighting hundreds of thousands of pounds of thrust, generated by liquid hydrogen and oxygen, which will literally burn your face off if you get too close.

Meanwhile, back on the ground, it might be time to start paying attention to Microsoft.

Twitter: @japhychron
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No positions in stocks mentioned.
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