Microsoft: Exploring Its Surface Hardware Goldmine – Microsoft Corporation (NASDAQ:MSFT)

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Hardware is a tough business to enter; with high standards from loyal customers and strong competition, many new arrivals tend to flop. Microsoft (NASDAQ:MSFT) is trying to change that. Though the company has been selling its own hardware for some time, since 1980, it really started making a device compatible with its software only in 2013 with the introduction of the Surface Pro. Yes, the Xbox, since its launch in 2001, has seen its fair share of success, but that isn’t what I want to talk about here. As a company that excels (no pun intended) with computer software, it makes sense for it to begin actually making a computer. This move is similar to Google’s (NASDAQ:GOOG) (NASDAQ:GOOGL) introduction of the Pixel, after being behind the most popular smartphone software in the world, Android, for years. Computers are now well-positioned to make up a large part of Microsoft’s future, especially in terms of its hardware. This article will explore Microsoft’s new hardware and the impact that it will have on the company.

New Products

It seems that Microsoft is moving away from the Surface Pro, its first portable computer, with products like the Surface Laptop and new Surface Pro X. The 13”, 1.7 pound, touchscreen Surface Pro X raised some eyebrows when it claimed to have a 13-hour battery life. With a fairly large screen, packed into a 7.3 millimeter deep aluminum box (for reference, an iPhone 11 is 8.3 millimeters deep), it seemed improbable to have such a long battery life. Some speculated that Microsoft had skimped on its display or performance in order to meet this, yet both are comparable to their other computers as well. The device is also equipped with LTE connectivity capabilities, enabling it to become an extremely mobile computer, especially with its low weight and long battery life. Another aspect of this device that some people thought was curious was the processor that was developed by Microsoft, in partnership with Qualcomm (NASDAQ:QCOM). The processor is meant to be fully optimized for the device, allowing Microsoft to deliver on its impressive battery, in its small package, without compromising on specs.

Source: Microsoft

The Surface Laptop is a different approach to the mobile computer. A more traditional approach. Both the Surface Pro and Surface Pro X feature a kickstand and detachable keyboard, but the Surface Laptop has a much more traditional “laptop” appearance. This device isn’t new like the Surface Pro X, it’s on its third iteration, but its initial introduction in mid-2017 makes it a young product that is still evolving. However, the introduction of a 15” variant is quite a change for the young laptop and may open it to a larger market. With additional changes over the previous generations, such as a larger trackpad and increased performance, Microsoft is clearly working to improve the device. With these newer devices being given the limelight, it makes sense to see the Surface Pro receive very few updates as it may soon be phased out by these newer devices.

Source: Microsoft

What the new Surface Pro 7 laptop lacks in innovation over the previous generation is made up for tenfold by Microsoft’s new Neo and Duo devices. While it could be interpreted as a weakness that the phone is using Android, as opposed to Windows 10 Mobile, this is likely going to be a huge benefit after the spectacular failure of Microsoft’s first smartphones. It is promising to see that Microsoft seems to have learned its own limitations and is using an operating system (“OS”) that will greatly benefit the device’s demand. These devices are being positioned in a bit of a weird space too. Both devices are dual-screen displays, connected by a hinge that can be opened similarly to a book. This hinge, unlike foldable displays, separates each screen into two separate halves, as seen below, and can be moved 360 degrees as opposed to stopping flat at 180 degrees as folding phones do.

Source: MacRumors

The Neo is noticeably larger than the Duo and is being marketed more as a laptop than a phone. And rightfully so. The Neo has an available keyboard attachment that can fold onto its second screen, as the image above shows and both devices are compatible with the Surface Pen. Each of the Neo’s screens are also 9” wide, allowing it to be large enough to be a functional laptop, but far too big to be considered a phone. The Neo features two 5.6” screens that, again, can fold and leave it in the smartphone category. Beyond what I’ve just said, very little is known about either device – including price. However, this radical design is the main point of both devices and is really the important part. The innovation by Microsoft in all of these devices is pretty exciting, though innovation is worthless without demand.

Demand

The original Surface Pro computers sucked. As a former owner of the Surface Pro 4, I can attest that many of the issues talked about were very real and very frustrating and often couldn’t be solved with a simple fix. However, these issues are no longer commonplace and the computers hold up as they should. The Pro X is the only device of its kind, combining incredible mobility and functionality of a laptop. The ability to use LTE makes this lightweight device ideal for those who travel a lot, but the lightweight and thin package make it appealing to your average consumer as well. It’s also not like the device skimped on its specs to achieve this, it’s 13” wide, with 13 hours of battery life. The device also comes with a minimum 8GB of RAM, though can be upgraded to 16 for a higher price. When looking at the purpose behind a laptop, a highly portable work station, it is apparent that Microsoft really strove to deliver on this to capture high demand. The device is also priced similarly to devices with similar specs, but also includes the various advances that are unique to the Pro X. All of this gives the Pro X a very wide market scope and makes it appealing to the average laptop consumer.

At first glance, the Surface Laptop is a typical touchscreen laptop. However, further examination reveals much more. First, starting at $899, the Surface Laptop has a compelling price, especially considering other similarly-equipped laptops. While I’ve already discussed many of the technological innovations above, I haven’t discussed the aesthetics of the device yet. Achieving an even more minimalist design than Apple’s (NASDAQ:AAPL) Mac laptops isn’t easy, yet Microsoft was able to achieve it by putting its speakers underneath the keyboard, eliminating the need for speaker holes. This clean interior is complemented by a matte outside with a glossy Microsoft logo, as seen below. The Microsoft brand is already quite well known, the most popular among laptops, which will also likely help Microsoft’s acceptance into the market.

Source: Microsoft

From Microsoft, the Duo and Neo actually make a lot of sense. The basis of its software is high functionality, these devices offer just that. For easy and effective multitasking, it seems that these two devices will be the front-runners entering the 2020 holiday season. As both devices are being marketed as tools to maximize efficiency, the Neo will probably see greater demand than the Duo. This is due to the Neo’s position as a laptop, as opposed to the Duo’s position as a foldable phone and it’s likely harder to sell functionality in a phone, which lacks a keyboard and screen real-estate, than it is a laptop. The only real advantage of the Duo over other foldable phones, before knowing its price, is its durability. Since the screen itself doesn’t have to bend, Microsoft can use typical, hard, glass on its screen and keep it water and dust resistant, which other folding phones can’t do. The company may also be able to sell some people on its functionality, but if you don’t mind the lack of durability that comes with a regular folding phone, the Duo’s probably not for you. The Duo may also be able to see some demand as a gaming phone, as one screen can be used as a control pad while the other is used as a display, similar to the Nintendo DS. The Duo should also benefit greatly from using Android, the most popular OS in the world, with the ability to use more apps and eliminate any headaches or inconveniences that are usually associated with switching your mobile OS. The only real competition that the Duo may see is from the LG G8X ThinQ Dual Screen. However, LG’s (KRX:066570) device is less clean, with uneven weights on either screen and the hinge lacks the ability to open a full 360 degrees. The phone also features larger bezels than Microsoft’s, furthering its aesthetic disadvantage.

The Neo should see strong demand. There is no other device like it and the ability for it to function as a laptop is incredibly important. This, to me, seems like what Microsoft was trying to do with the initial Surface Pro. It combines the portability of a tablet, in this case made even more portable due to its smaller form when folded, with the power and functionality of a tablet. Tablets also do have some advantages over traditional laptops, in terms of the touchscreen, but this implementation allows for customers to enjoy a truly seamless integration of the laptop and tablet. The usage of Windows for the device further enhances the functionality of it and emphasizes the intention for work to be done on it. As a former owner of the Surface Pro, I can attest that I never saw the need to use the device as a tablet, as opposed to a laptop, though the Neo looks to have nailed this. The detachable keyboard allows for the seamless transition from laptop to tablet and vice-versa. Asus (OTC:AKCPF) has made a similar device, the ZenBook Pro Duo, though it is likely priced much higher than Microsoft’s device will be and lacks the versatility to become a tablet, due to its fixed keyboard. This device is the first of its kind from Microsoft and creates an exciting future for the brand that will likely continue to iterate and improve upon this design.

Company Impact

The Surface lineup has been relatively successful in recent years, seeing 21% growth in revenue over the previous year, but this appears to just be the beginning. The new Surface devices that Microsoft is releasing should be quite exciting for investors as the company continue to be innovative and with solid products. In the long term, I believe that Microsoft has the potential to sell laptops as well as Apple, which sold $25.74 billion worth of Macs this past year. As the most popular OS for laptops, controlling 87.76% of the market, Windows is another conduit to increase sales for Microsoft to this level. This would create an incredible increase over Microsoft’s current annual “More Personal Computing” revenue of $42.72 billion (author calculations annualizing Q3 report). While this dwarfs Apple’s $25.74 billion of Mac sales, Surface sales represent the gross minority as further investigation reveals that “Devices” represent just 13.32% of the aforementioned $42.72 billion, or $5.692 billion total (author calculations annualizing Q3 earnings breakdown). Raising this number by just over $20 billion would be 352% growth. This may sound quite extreme, but I believe that this growth could happen within five years due to the clear competitive edge Microsoft has manufactured and its products continue to become more refined.

Another important effect of these products seeing success is the resulting growth that Microsoft’s software will experience. It stands to reason that if more people are using Microsoft’s laptops, they will then have greater exposure to the company’s software and more people will be using it as well. Microsoft’s venture into the hardware sector is set up to be quite successful for the company overall, leading me to recommend a long position in the company. I strongly believe, due to what I’ve laid out above, that Microsoft will experience steady and strong growth in the years to come and will be a major player in the laptop industry.

Disclosure: I/we have no positions in any stocks mentioned, but may initiate a long position in MSFT over the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.



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