Microsoft Cuts Costs: Is That A Good Or Bad Sign For Its Competitors?

Tickers in this article: MSFT NOK HPQ ORCL

By Chris Lau for Kapitall.

When growth companies cut jobs, it’s usually a sign that the positive momentum is behind it. In Microsoft’s (MSFT) case, the software giant continues to spend an enormous amount of effort to find growth. Microsoft is certainly dominant in the enterprise space, but it struggles in markets that offer growth: mobile and online search.

Xbox studio shut down

Microsoft will shut down Xbox Entertainment Studios. The unit was responsible for original video programming. Closing the unit will let the firm shift its focus on videogames instead. There are up to 200 staff members in this unit.

In the mobile division, Microsoft will close down the feature phone segment of its newly acquired Nokia (NOK) phone unit. This means that support for feature phones (like the Asha phone) will end in 18 months.

Job cuts outside Nokia unit

Of the 18,000 jobs Microsoft is cutting, around 5,000 could be Windows engineers. The cut signals Microsoft will wind down support for legacy technology. This will help Microsoft’s bottom line, but more importantly force the company to allocate resources on more innovative initiatives.

Takeaway

Microsoft’s new chief, Satya Nadella, is making the right, painful move that is needed to make the firm more nimble. The cost reduction will not reverse Microsoft’s struggle in the tablet and mobile space, but it is a start. Gaining market share in mobile will be hard for Microsoft regardless of the change in headcount. Windows Phone is still struggling to gain market share, though the low-end devices could win over feature phone users. Profit margins are much lower in this segment, but at least Microsoft will have a bigger user base.

Alternatives

Investors who missed the big run-up in Microsoft (which closed at $44.69 recently and is up 26.1% in one year) could look at HPQ (HPQ). HP diversified from Windows-based tablets and is pushing Android tablets in the market. Chances are good that it will succeed. Oracle (ORCL) struggled after stumbling in the last quarter, but the database giant keeps executing well. Its stock trades at lower multiples than Microsoft, at a forward P/E of just 13.

Click on the interactive chart to view data over time. 

 

1. Hewlett Packard (HPQ): offers various products, technologies, software, solutions, and services to individual consumers and small- and medium-sized businesses (SMBs), as well as to the government, health, and education sectors worldwide. Market cap at $65.14B, most recent closing price at $34.81.