Why Asia’s policies cause concern for Microsoft
Microsoft 2Q15 earnings review: Is it really transforming? (Part 10 of 11)
Geopolitical issues in China, Japan, and Russia
In 2Q15, Microsoft (MSFT) stated that the company faced a major decline in its revenues in China, Russia, and Japan. The disagreements between the US government and the governments of China and Russia led to issues in China and Russia. Windows is considered to be a security threat in both countries due to the US’s aggressive National Security Agency (or NSA) domestic and international surveillance program.
Because the current geopolitical issues in China and Russia, along with increased value added tax (or VAT) in Japan, Microsoft faces continued pressure on its both Windows and Office licensing revenue. The performance of the iShares MSCI Russia Capped Index Fund (ERUS) and the Market Vectors Russia ETF (RSX) provides a good gauge of the Russian economy. As a result, Microsoft’s shares tumbled by 9.3% on January 27, 2015, a day after the company announced its results, its sharpest decline since July 2013.
If Microsoft is able to alleviate the geopolitical issues surrounding its stock, it will not only benefit investors but also ETFs such as the Powershares QQQ Trust (QQQ) and the Technology Select Sector SPDR Fund (XLK), which have 8.00% and 9.61% exposure to Microsoft, respectively.
Japan’s sales tax increase leads to Windows revenue decline
As the above chart shows, Japan saw a huge jump in its sales tax in 2014. This tax increase led to decreased consumer spending in Japan, leading to a decline in Microsoft’s revenues. Anticipating this near-term pressure in the PC software section, Microsoft estimates commercial revenue from software licenses to fall in the range of $9.7 billion–$9.9 billion for 3Q15, as compared to ~$10.3 billion in 3Q14.
As mentioned earlier in this series, continued weakness in Asia’s policies and markets, especially in China and Japan, should impact Microsoft’s growth prospects in the near future. Also, the fluctuating foreign exchange due to the strengthened dollar is expected have an effect.
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