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Market Update

Windows Shatters Microsoft's Fourth Quarter

With its reorganization and a shift to devices and services still in its early stages, Microsoft has more work ahead to catch rivals in the fast-growing mobile and cloud markets, says Morningstar's Norman Young.

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 Microsoft (MSFT) reported weak fourth-quarter results, highlighting the challenges facing its Windows franchise due to the declining fortunes of the PC market. Nevertheless, with our relatively modest expectations and the fact that a large part of the weak results were because of a one-time inventory write-down, we're sticking with our fair value estimate. Although we believe the firm still has a wide Morningstar Economic Moat rating, we highlight our negative moat trend rating.

The firm's flagship Windows division suffered from a $900 million write-down for Surface RT inventory, confirming what had long been suspected: RT tablets are selling poorly. On a generally accepted accounting principles basis, Windows revenue increased 6.2% versus the year-ago period as modest commercial sales were offset by abysmal consumer demand. Overall, this was the theme for the quarter, as the other business segments reflected a still-solid enterprise business that took share in key markets, while the consumer side of the business remained weak.  

Norman Young does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.