Software giant Microsoft (Nasdaq:MSFT) has hit another one of those pockets where there is just not much going on to excite investors. The next iteration of Windows 8 won't come out for months, the company is annualizing the Office 2010 launch, the PC market is soft, and a lot of the company's enterprise products are still building up some momentum. So while this stock looks quite cheap on its cash flow generation potential, value-oriented investors interested in this name have to bring ample patience with them as well.

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A Ho-Hum First Quarter
Microsoft reported overall revenue growth of 7%, which is not so bad in the broader context of mega-cap tech names like IBM (NYSE:IBM) or Oracle (Nasdaq:ORCL). Revenue from Windows was up just 2% as sluggish domestic PC growth hurt sales and rampant software piracy in regions with high PC growth sapped sales. The server and tools segment showed a nice 10% increase in sales, while the business unit was up almost 8% and entertainment was up more than 9%.

Where Microsoft did not do so well was in margins. Gross margins slid more than two points from last year and operating income growth was just 1%. Some of this margin erosion can be tied to higher royalties in the Xbox business, while the online partnership with Yahoo! (Nasdaq:YHOO) is also having a negative effect. Last and not least, the Skype deal is bringing lower margins with it and incremental integration expenses.

When Will Mobile Ventures Pay Off?
One of the big worries around Microsoft is that Google (Nasdaq:GOOG) and Apple (Nasdaq:AAPL) have already elbowed them out of the growing mobile device market. To be sure, Microsoft was caught unawares here and is clearly behind today. On the other hand, this market is still younger than many investors seem to realize and Microsoft is not exactly helpless.

The question, though, is whether Microsoft's initial moves are the right ones. In some respects, Microsoft's deal with Nokia (NYSE:NOK) is like the opposite of Google's deal with Motorola Mobility (NYSE:MMI). Motorola has at least had some successful smartphone launches in recent memory and the buyout gives Google access to patents. Microsoft, though, is not acquiring that IP and instead has to hope that Nokia management can rebuild the company into a contender.

Skype is likewise a tricky deal to assess today. Skype certainly has potential, but eBay (Nasdaq:EBAY) and other prior owners were not able to deliver or realize that potential. In theory, pairing Skype with third-party licensors could be very powerful for Microsoft, but this will take years to build.

Microsoft Should Consider a Bigger Enterprise Push
Conventional wisdom on Microsoft seems to understate the extent to which Microsoft already plays in the enterprise IT space. Even allowing that the business division sells plenty of product to "civilians," this is a sizable enterprise IT business. That is not to say that sizable cannot become bigger. Microsoft would likely have little interest in acquiring VMware (NYSE:VMW) or Red Hat (NYSE:RHT), but that does not mean that Microsoft cannot take a page out of the IBM-Oracle book and make a few selective growth-additive deals. After all, it's not like Microsoft gets much of a multiple as is or much credit for returning that cash to shareholders.

The Bottom Line
Microsoft hardly inspires pity or sympathy, but this is not a company that I would like to run. It is almost impossible to keep focus on an innovative culture across such a large business - especially when it has such large legacy-support needs. With that size and scale, it's hard to be innovative and hard for innovations to really stand out and get much attention.

Microsoft needs to decide on some new dynamic directions for the business (like the aforementioned enterprise-focused acquisitions) and then sell the Street on that direction. If they don't or can't, this stock is likely to stay a value for some time to come. Investors can certainly buy into this undervalued cash flow stream, but they need to have a proper perspective - however inadequate the multiple may be, the Street feels like it has this one figured out and a significant realization of that underlying value is likely to come only from shaking up those perceptions. (For additional reading, see A Primer On Investing In The Tech Industry.)

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