Microsoft’s New Ventures Threaten Margins

Microsoft (NASDAQ:MSFT) CEO Steve Ballmer’s push into new businesses — more specifically the cloud — may have a negative impact on the company’s already diminishing gross margins. According to analysts, the additional costs of running massive data centers required to store data to service clients on the “cloud”, could amount to 15-25% of revenues. These costs are about 10% higher than the company’s cash cow packaged software.

According to Heather Bellini, an analyst at Goldman Sachs Group Inc (NYSE:GS), “the cost of storing software in Microsoft’s own data centers, combined with other expenses, means the company may miss profit estimates for fiscal 2012.”

“Margin pressure is making some investors leery of Microsoft stock, and may weigh on the shares in coming months,” states Walter Price, who manages the $3 billion Allianz RCM Technology Fund at RCM Capital Management in San Francisco.

Other headwinds Microsoft may face range from slower spending by governments and financial customers due to the debt crisis, cyclical growth downturns in the core Windows and Office software businesses, and the disruption in the PC industry due to flooding in Thailand and the resulting scarcity of hard drives.