Microsoft investors would better off if the company split up into three, according to Colin Gillis, technology analyst at BGC Financial. In a note released Tuesday, Gillis writes:
"Given the recent announcement of HP's plan to split into two different businesses in a tax-free manner, it raises the issue that if Microsoft is unable to generate meaningful hardware sales, or reignite the PC market, that shareholder(s) may best be served by the company splitting into three businesses: hardware, software, and enterprise services."
Gillis anticipates the company's enterprise market to be strong while its hardware and consumer sales will continue to soften.
"You've got a relatively robust enterprise business, selling PCs and software into the corporate market [and] you've got a very well-respected cloud services business with Azure," Gillis told "Talking Numbers" in an interview. But he contrasts that with the company's other lines of business. "You have a very lackluster consumer business on the PC side. And then you've got a hardware business that's going to be dragging down results and is likely not to be profitable."
CEO Satya Nadella now has to ask himself if he can unlock value by separating the business, Gillis said. "If you are able to do so, you may allow each business to compete better in the marketplace."
Nadella's efforts to streamline the company may make splitting up Microsoft unnecessary, acknowledges Gillis. "If he can get the hardware sales to reboot and regain some momentum, then fine, you can keep the one-company strategy," he said. But if Microsoft continues to lose ground with the Xbox One, Windows mobile phones and Surface tablets, "then maybe it's time to take all of those units, bundle them together, and spin them out and let them fight on their own."
Though Gillis believes Microsoft is both a value and a yield play (its current dividend yield is about 2.8 percent), he sees a major risk to its business coming from Google's dominance of the mobile market with its Android operating system.
"You do have to be worried about the trends that are stacking up against Microsoft," Gillis said. "There are multiple threats coming in at Microsoft and thus that may drive part of the rationale to improve the urgency for them to split up."
To see the full "Talking Numbers" interview with Colin Gillis on Microsoft, watch the above video.