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How Important Is Mobile to Microsoft?

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If Microsoft can't get its mobile strategy worked out, it could become a value trap stock. Tonight's earnings might provide more insight.

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Microsoft (NASDAQ:MSFT) announces earnings after the market closes today, and it should be interesting as the firm continues to be a juggernaut in technology and still has several cash cow businesses that are driving the bus.

But an article in the Wall Street Journal asks the question today: If Microsoft can't get its mobile strategy worked out, will it become a value trap stock, a la Hewlett-Packard (NYSE:HPQ) and Dell (NASDAQ:DELL)?

Given the long-term importance of mobile to almost all technology companies, the long-term answer to this question is obvious: Microsoft must show traction in mobile over the long-run to stay relevant and grow its business.

The article argues that the company must start to show that traction sooner or the stock will begin to act like a value trap instead of the value play that many investors think it might be. The article makes another great point: Microsoft trades at 10x its 2013 earnings, which means the market must not think too highly of its ability to meet those numbers. In fact, analyst estimates for Q1 2013 have been revised downward a few times now.

The article pins the future of the company's success on Windows 8, which is supposed to begin the march of Microsoft into more mobile integration between the desktop and mobile devices. Sounds like Apple (NASDAQ:AAPL), right?

The article also points out that the Microsoft Surface tablet must be a success, though not necessarily an iPad level success. Microsoft needs to show that it can produce a great tablet PC that uses its new OS.

All in all, I think Microsoft's future growth is very much pinned to this new OS – and whether Surface is an acceptable 'pilot' tablet PC with a Windows OS. Just look at the rest of its businesses: gaming, MS Office, search, and server software. None of these businesses is going to drive more than low single-digit growth at best. This is the product that future business growth is pinned on.

Microsoft needs to get better at mobile and it needs to do so quickly. I am definitely interested in testing its new tablet. It won't replace my iPad any time soon. But whether it is an acceptable replacement will help to answer the question of whether Microsoft can be relevant in mobile.

One bad sign for me on Microsoft has been its failure to launch the MS Office platform for the iPad. MS Office continues to be the dominant workplace productivity suite. It is even the dominant office suite in the Mac environment. However, the iPad has been out for years now and the company still hasn't launched that software for the iOS platform. It is just a missed opportunity and really makes me wonder if Microsoft actually understands the mobile user.

Tonight's earnings might provide some insight into Microsoft's traction in the mobile space. The next two quarters are probably much more important to that assessment. But tonight's earnings will begin to paint the picture.

I wouldn't start a position on Microsoft yet, but if it shows traction in the mobile arena, I think it would begin to look attractive at this $29 level. Tonight's metrics around the Windows 8 platform and pre-sales on the OS and tablet will help us understand that traction.
No positions in stocks mentioned.
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