Microsoft is good at making software and it should stick to it, analysts say, adding that exiting the hardware business could see the company's share soar.
According to a recently published report by Reuters (opens in new tab), Microsoft’s hardware division, comprising of mostly Xbox and Surface tablets, is showing great sales. However, they contribute less than a 10th of the company's revenue and – they’re barely profitable.
"Unless Microsoft can get to hardware break-even within two years or demonstrate sufficient offsetting value elsewhere in the portfolio, we think the company should exit the hardware business," RBC Capital Markets analysts said in a client note.
Exiting hardware could add up to $4 per share to Microsoft's market value, they said.
Under the new CEO Satya Nadella, Microsoft has shifted its attention to cloud business and corporate software, but it said it would pump ensuing savings into its hardware division, as well.
Analysts agree that investing in cloud and Windows 10 makes strategic sense, but some say the rationale behind pouring more money into hardware is less clear.
"Hardware remains a more commoditized piece across tech," said FBR Capital Markets analyst Daniel Ives, who thinks all of Microsoft's resources should be going into software.
"Hardware is not what got Microsoft here - software did."
Even so, Nadella said he remained committed to making phones to attract Windows users.
"We believe redeploying funds into ... hardware is a mistake given that business's lack of margin and strategic importance to Microsoft," Jefferies & Co analyst John DiFucci told Reuters.