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July 17, 2014 7:45 pm
The 18,000 job cuts that newish Microsoft boss Satya Nadella announced on Thursday could be seen as a much needed step to turn round the ailing software company’s sagging stock price. The only problem with that storyline is that Microsoft shares are up 20 per cent in the past year and its market capitalisation is now a staggering $370bn. Those figures form the basis of Mr Nadella’s dilemma.
Last week, Mr Nadella set out a strategy of being “a productivity and platform company for the mobile-first and cloud-first world”. Sounds forward-looking. But the cash that Microsoft ploughs into dividends and buybacks comes from its dominance in desktops. Microsoft’s gambit comes at an intriguing moment. Its longtime PC ally, Intel, has been buoyed by strong PC demand (its shares are up 40 per cent in the past year). By talking up Microsoft’s newfangled “cloud” and “mobile” approach Mr Nadella is begging to be judged by progress in those areas. But simply being a massively profitable and efficient PC software company may be good enough to keep investors excited.
On the mobile front, Microsoft said its Nokia unit would focus on cheap phones, the fastest growing segment of the market – and it will stop making handsets that run on Android. Nokia will need fewer people to do this so 12,500 of the cuts come among Nokia factory and office employees. The question remains how, precisely, Microsoft will win in mobile and cloud. Mobile seems like a taller order because the company will be taking on Apple, Google and Samsung. Its cloud computing platform, Azure, has shown more promise. There could be a way to shoehorn the dominance of Windows and MS Office into mobile phones. Regardless, shareholders are in danger of being stung: Microsoft’s price-to- earnings multiple is, oddly enough, at a five-year high.
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