Despite Q3 earnings growth, Microsoft shares fall

It hardly was a disaster on par with Research in Motion's stock severe (and deserved) beatdown, but on Friday shares of Microsoft (NASDAQ: MSFT) saw their biggest one-day plunge in nearly two years after the company reported strong quarterly earnings growth Thursday.

Microsoft's stock fell as low as 25.36, or 5.1 percent, from Thursday's closing price of 26.71 before recovering to finish Friday at 25.92, down 3 percent.

Research in Motion (NASDAQ: RIMM), in the wake of the company's Thursday warning regarding current-quarter earnings and BlackBerry sales, ended Friday's trading down 7.94, or 14 percent, to 48.65.

(Also see: RIP, RIM)

Why would Wall Street react so negatively to Redmond's fiscal third-quarter 31 percent increase in profits and gains in revenue for four of the company's five business units?

Because the legacy cornerstone of Microsoft's software empire -- its Windows operating system -- is being threatened by a slowdown in PC sales that may not reverse itself in an increasingly mobile and cloud-based computing world. Revenue for Microsoft's Windows and Windows Live Division fell 4 percent from last year's Q3, the only one of five business units that suffered a sales decline.

Worse, Microsoft's efforts to compete in the online world as well as mobile computing have faltered badly. Its Bing search engine's market share is dwarfed by Google's, and its bid to compete effectively in the smartphone arena so far has failed. With its Nokia partnership at least eight months away from shipping smartphones powered by Windows Phone 7 -- if it happens at all -- Microsoft is several quarters away from proving to Wall Street that it can compete effectively with Apple and Google.

How about Microsoft's business unit, which makes the company's Office software and generates 32 percent of total revenue? It turned in a good quarter, with sales up 21 percent and profit up 25 percent. Decent numbers, certainly, but Business Insider's Matt Rosoff makes a valid observation:

Investors might also be concerned about the approaching anniversary of Office 2010's release. Microsoft's Business Division -- which includes Office and some business servers like Exchange (email) and SharePoint (collaboration) -- has been the main driver of growth for the last three quarters. But Office 2010 was released toward the end of June last year. As the anniversary passes, that division will be facing much harder comparisons with last year.

The largest revenue growth in Q3 came from the company's Entertainment and Devices Division -- maker of Xbox game devices and Kinect sensors -- which increased sales by 60 percent to $1.94 billion from $1.21 billion a year ago.

But that unit is by far the smallest of Microsoft's four product divisions, generating just 11.8 percent of overall sales. Plus, does anyone really think Microsoft's future lies in gaming?

Change has come fast in the computing industry over the past 15 years, and Microsoft has struggled to adjust. Things aren't likely to get any easier down the road.