Motley Fool: Mr. Softy eyes transition into hardware world

Microsoft (Nasdaq: MSFT) became dominant by shunning hardware and controlling the code that powered it. However, change is afoot.

Hardware isn’t totally new to Microsoft. It has long sold Microsoft-branded peripheral products such as keyboards, and its foray into gaming gave it experience designing hardware systems.

In fact, the expertise Microsoft acquired from designing the Xbox and Xbox 360 is underappreciated, with much of the new Xbox 360’s impressive engineering done by Microsoft’s own engineers.

Microsoft recently bought a “microarchitecture” license from Arm Holdings to develop its own processor cores around Arm’s technology. This suggests that Microsoft wants to get more involved with designing the hardware that melds with its software. If the company had more expertise in this area, maybe its promising Courier tablet concept would have lived to compete with the iPad. Instead, it seems to have stagnated before being canceled.

The licensing purchase gives the impression that Microsoft is willing to push the envelope in finding a way to make its mobile operating system relevant again.

Hey, it’s a long shot, but it beats the status quo. The software Microsoft is dead – long live the new Microsoft. (Microsoft is a “Motley Fool Inside Value” pick.

Ask the Fool

Q: I read an earnings report recently that showed a profit of $1.26 per “diluted” share. What is a diluted share? – M.K., Abilene, Texas

A: A company’s bottom-line profit, or “net income,” is divided by its total share count to arrive at its earnings per share (EPS). The EPS is sometimes reported in two ways, as “basic” and “diluted.”

Basic EPS uses the number of shares that currently exist, while diluted EPS is more conservative, including shares that COULD exist, if people exercised existing stock options, for example. Other securities that could be converted into common stock are also accounted for. Diluted EPS is the better number to look at.

Q: If a company is reporting increased losses per share instead of increased profits, should I avoid it? – S.O., Augusta, Ga.

A: Maybe, but not necessarily. Companies sometimes make or spend a lot more in one year than another – perhaps because they’ve introduced a popular new product or have ramped up their research expenditures.

Imagine the young Drive-Thru Dentistry (ticker: DRILZ) company. Let’s say it lost about $20 million in 2008 and $60 million in 2009, though its revenues nearly doubled during the same period. Some investors see numbers like this and run the other way, preferring to invest only in companies reporting steadily increasing profits. That’s not crazy.

But those willing to take on more risk may still consider buying, if other factors are compelling. These folks might figure that for emerging start-ups like DRILZ, this is the time when they should plow available money into advertising and growing the business. They reason that the time for profits is later, once the company has amassed a huge customer base.

My dumbest investment was drinking the company Kool-Aid. I bought shares of stock in my employer, Humana, for around $62 apiece, and rode them down to $32 before the smelling salts kicked in. What an investment hangover. – S.M., online

The Fool responds: Humana’s stock chart has been bumpy in recent years, partly due to prolonged uncertainty over how our nation’s health care reforms would affect it. The reforms we got, though, seem promising for companies such as Humana, driving newly insured new customers to it. With shares back up above $50 recently, investors don’t love the company unanimously, but many expect it to outperform the market, given its revenue growth, low debt, strong cash flow and reasonable valuation.

Still, promising though it may be, no single stock should make up the bulk of your investment portfolio, even if it’s your employer. The fact that you know your employer better than most other companies does give it an edge, but the company still needs to be compelling, and you should never own too much of it, as Enron and BP employees would tell you.