It really is too bad that the conversation on Microsoft (Nasdaq:MSFT) always seems to be dominated by what the company isn't. Bearish analysts and investors hammer the company for its heavy reliance on PCs and fault the company for letting Apple (Nasdaq:AAPL) and Google (Nasdaq:GOOG) build such a large lead in mobile operating systems, while also complaining about the company's relatively weak online business and below-average entertainment profitability.

Those are legitimate criticisms, but only to a point. It is not as though smartphones and tablets have replaced PCs in the office environment, nor are they likely to anytime soon. What's more, Microsoft has a bigger (and faster-growing) presence in enterprise software than is usually appreciated. Last- and by no means least, Microsoft remains an exceptionally profitable company that generates exceptionally large amounts of cash every year.

SEE: Microsoft Vs. Apple

Fiscal Third Quarter Pretty Good Relative To The Market
Given the steady drumbeat of negative news on enterprise and consumer IT spending, I think Microsoft had a pretty solid quarter.

Revenue was slightly below expectation, but up 18% over last year and up about 11% on an adjusted basis. Windows revenue rose 23% as reported, though performance was closer to “flat” after excluding recognized deferrals and down about 9% after excluding Surface revenue. Servers and Tools was up 10%, though, and while that number is below the consensus guess (by about 2%) it was still quite a bit better than the performance at IBM (NYSE:IBM) and Oracle (Nasdaq:ORCL) this quarter.

Microsoft also disappointed a bit with Business revenue, with revenue growth of 9%. Online revenue was up 18%, though, on 22% ad revenue growth and share growth for Bing. Last and not least, Entertainment and Device revenue jumped 57% on very strong Xbox 360 platform growth.

Where Microsoft really delivered this quarter was on its expense control and profit margins. Gross margin did fall about 70bp from last year, but came in more than a point higher than analysts projected. Likewise, operating income rose 19% as reported, with operating margin up 60bp and almost two points better than the average sell-side target.

SEE: A Look At Corporate Profit Margins

Can Microsoft Change The Tone On Win8 And Mobile?
Windows 8 has been on the market for a little while now, and the reviews have not been very good. While there are certainly some fans of the new operating system, most reviews (particularly those not using touch-enabled systems) have been harshly critical. In fact, while it looks like the underlying performance of Windows revenue was better than the reported decline in first quarter PC shipments (down about 14%), more than a few commentators have blamed Windows 8 for the poor pace of PC sales.

On the mobile front, Microsoft continues to make slow progress at best. Nokia (NYSE:NOK) is doing a little better with the Windows-powered Lumia smartphones, but there is nothing in the numbers to suggest that Apple, Google, or Samsung have much to worry about.

Neither of these developments are good for sentiment on the stock, but I'm not sure they're serious long-term problems. Microsoft is preparing an update to Windows (codenamed “Blue”) that would seem to address at least some of the major Win8 complaints, and that should be out later this year. On the mobile front, Microsoft has more than enough time (and cash) to play a long-term game, and I wouldn't rule the company out at this point.

SEE: Microsoft: By The Numbers

The Bottom Line
Even though Microsoft's revenue growth has bounced back into the double digits, nobody expects this to continue – most analysts are calling for mid/high-mid single-digit revenue growth at best for Microsoft over the next few years. Coupled with worries about the demise of the PC and poor strategic/competitive positioning in mobile, Microsoft's improved margins and strong cash flow just don't resonate with what most tech investors want in a stock.

Consequently, I see Microsoft as a value stock, but one that does carry risk of being a value trap. Microsoft has a huge amount of cash, but barring a major increase in the dividend there will always be the nagging question of whether management can/will reinvest it successfully. On a more positive note, even meager free cash flow (FCF) growth in the neighborhood of 1% to 2% is enough to merit a fair value well above $40. For investors with the patience to play the long game, I think Microsoft offers pretty limited downside and at least a fighting chance for respectable long-term performance.

At the time of writing, Stephen D. Simpson did not own shares in any of the companies mentioned in this article.

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