Janney: Microsoft Needs to Innovate to Boost Stock

Microsoft Corp.’s stock will languish at current levels until the company can prove that it can excel in the post-PC era, says Janney Capital Markets analyst Yun Kim.

THE OPINION: Microsoft and other companies dependent on personal computers have been struggling with a shift in consumer preferences away from desktops and laptops and toward smartphones and tablets. Many investors are wondering where Microsoft is headed, given the company’s announcement last week that CEO Steve Ballmer will retire sometime within the next year.

Kim reiterated a “Neutral” rating on Microsoft’s stock Tuesday. The analyst said the company’s shares, currently trading in the $33 range, are driven by the growth prospects of its Windows franchise and its ability to stay relevant in the post-PC era. But until there are signs that Microsoft can innovate and successfully execute in this new marketplace, Kim expects the stock to languish at its current levels.

Kim expects Ballmer’s successor will come from outside Microsoft, given that many key senior executives have left the company or retired in recent years. Microsoft is in need of a cultural change to increase collaboration between different product lines and to foster faster innovation, says Kim, and he thinks an outsider would have a far better chance of executing this shift than a current employee.

Microsoft’s relevance in today’s consumer market also lies on its ability to leverage its success in the Xbox business, says Kim. If the company can provide an integrated entertainment experience across all devices, such as phones and tables, it could prove more attractive to customers and investors. Microsoft is introducing a new Xbox One console in time for the holiday season.

THE STOCK: Microsoft shares fell 75 cents, or more than 2 percent, to $33.40 in afternoon trading, outpacing a broader market dip. The company’s stock has been somewhat volatile over the past year on changes in the marketplace and leadership announcements, but it is up 11 percent from this time last year.