Microsoft Stock: 3 Different Bear Cases You Haven't Thought Of

By Rich Duprey, Steve Symington, and Timothy Green Markets Fool.com

The shift to the cloud has treated Microsoft (NASDAQ: MSFT) well, and though the ubiquity of its software means it is still a force to be reckoned with in personal computers, there's now so much more to this tech giant, and arguably, it's a lot more important.

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Yet as much of a tear as Microsoft has been on -- and not just the past year, but the past five years, really -- there's good reason to be mindful that there's always downside risk to a stock. So, while there are some very well-worn cautions out there about the company and its shares, we asked three Motley Fool contributors to each share a bear case for Microsoft you might not have thought about.

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The cloud may not be as profitable as you think

Tim Green (Commoditization of cloud infrastructure): Microsoft, along with Amazon(NASDAQ: AMZN),Alphabet's Google, and others, are pouring money into building massive cloud data centers. Gartner expects the infrastructure-as-a-service market, currently led by Amazon, to grow by nearly 37% this year, to $34.6 billion.

Cloud computing is more complicated than just IaaS, where virtual servers and storage are rented. Platform-as-a-service provides an environment to develop applications without having to manage the underlying infrastructure, and the various cloud platforms offer differentiated sets of tools and features. But IaaS is essentially a commodity. A virtual server from Amazon is essentially the same as a virtual server from Microsoft. 100GB of cloud storage from Amazon is the same as 100GB of cloud storage from Microsoft.

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Demand for IaaS is growing so quickly that the major providers are capable of producing some impressive profits. Amazon's AWS managed a segment operating margin of 25% during 2016, for example. But as the market matures, competition will get fiercer, and that means even more aggressive price-cutting than we've already seen. This market will ultimately be governed by supply and demand, and once demand is no longer outpacing supply, it's hard to imagine those lofty profit margins holding up.

For Microsoft, this means that at least some of the billions it is pouring into its cloud business may ultimately earn lackluster returns -- far lower than its traditional software business. Investors may not be taking that risk into account.

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A disruptive new gaming model

Steve Symington (The rise of "console-free" gaming): It's tempting to call Sony's PlayStation 4 the biggest threat to Microsoft's gaming business. After all, Sony grew the number of PS4 units sold by 15.5% year over year last quarter, to 9.7 million. Meanwhile, Microsoft's gaming revenue declined 3% (down 1% at constant currency), as lower Xbox console sales were only partially offset by Xbox software and services revenue growth.

However, I think an even larger threat to both systems looms with the impending rise of console-free gaming. Take NVIDIA's (NASDAQ: NVDA) on-demand GRID Gaming as a Service (GaaS) solution, for example, which NVIDIA boasts can afford gamers "freedom from the console" with high-quality, low-latency gaming on any PC, Mac, smartphone, tablet, or TV. All you'll need is a broadband internet connection. And because GRID renders the games on NVIDIA's cloud servers, then encodes each frame and streams it to the device, gamers won't be required to upgrade their local hardware, don't need physical discs, and don't even need to download or install the games they wish to play.

To be fair, Microsoft is certainly capable of launching a streaming game service like this through its Azure cloud computing platform. In fact, some gamers have already configured Azure instances to stream their favorite AAA game titles, ironically taking advantage of Azure's access to NVIDIA's powerful M60 GPUs in the process. If Microsoft went down this path, though, it would lose the lucrative revenue stream it currently enjoys by selling Xbox gaming console hardware.

At the same time, if it insists on sticking to its current console-centric model -- something that seems likely given its development of the next-generation Project Scorpio console -- Microsoft may be put in the difficult position of playing catch-up as console-free gaming takes off in the coming years.

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Pay now andpay later

Rich Duprey (More declining value assets): In the grand scheme of things, Microsoft's acquisition of LinkedIn for $26 billion last year, while not chump change, won't break the tech giant's bank, but it does serve to underscore what it's getting right and what it's doing wrong -- and therein lies some risk for the future.

As a positive development, it does confirm Microsoft's commitment to the business sector and the potential nexus between the social media platform, its Office suite of products, its CRM Dynamics software application, and the machine learning capabilities of Azure. CEO Satya Nadella said as much a year ago, when the deal was announced, when he described a "rich information graph" that would form by connecting the dots between LinkedIn's 433 million users, the 1.2 billion people using Office products, and the 300 million devices running Windows 10. Hopefully, all of the number-crunching will turn out something useful.

However, Microsoft doesn't have an enviable track record when it comes to making acquisitions. For example, it ended up writing off more in impairments and restructuring costs than the $9.4 billion it paid for Nokia. It also wrote off much of the $6.3 billion purchase price related to its acquisition of aQuantive in 2007, and it's hard to say what it gained from the $8.5 billion it spent on Skype, or the $1.2 billion paid out for its other foray into business social networking, Yammer.

LinkedIn's user growth was slowing before the purchase, and now that it's been rolled into Microsoft, we don't get those numbers anymore. But the idea that yet another asset with declining value has been added to the portfolio is hard to shake.

In the first full quarter that the platform has been a part of Microsoft, it added $228 million in revenue, but experienced a loss of $100 million in net income. Time will tell whether it was a smart move, and most investors seem willing to be patient to see how it works out, but the tech leader's willingness to spend a lot of money on ventures that don't pan out, and often cost it more in the end, is a risk investors need to consider.

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Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool's board of directors. Teresa Kersten is an employee of LinkedIn and is a member of The Motley Fool's board of directors. LinkedIn is owned by Microsoft. Rich Duprey has no position in any stocks mentioned. Steve Symington owns shares of Nvidia. Timothy Green has no position in any stocks mentioned. The Motley Fool owns shares of and recommends Alphabet (A and C shares), Amazon, Gartner, and Nvidia. The Motley Fool has a disclosure policy.