Microsoft's hardware strategy under scrutiny after record loss

Wed Jul 22, 2015 2:42pm EDT
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By Devika Krishna Kumar

(Reuters) - Sales of Microsoft Corp's Surface tablets and Xbox gaming consoles are soaring.

But they contribute less than a 10th of the company's revenue and, analysts say, they're probably barely profitable - if they are profitable at all.

So are the businesses worth it? Not unless they start to generate significant profits soon, some analysts say.

"Unless Microsoft can get to hardware break-even within two years or demonstrate sufficient offsetting value elsewhere in the portfolio, we think the company should exit the hardware business," RBC Capital Markets analysts said in a client note.

Exiting hardware could add up to $4 per share to Microsoft's market value, they said.

Microsoft, which is shuttering its Nokia phone business, said on Tuesday it would pump the ensuing savings into its fast-growing cloud business, Windows 10 and its hardware division, which includes tablets, Xbox and smartphones.

Analysts agree that investing in cloud and Windows 10 makes strategic sense, but some say the rationale behind pouring more money into hardware is less clear.

"Hardware remains a more commoditized piece across tech," said FBR Capital Markets analyst Daniel Ives, who thinks all of Microsoft's resources should be going into software.   Continued...

An advertisement for Microsoft is seen over 42nd Street in Manhattan, New York, July 15, 2015.  REUTERS/Rickey Rogers