Is Microsoft Stock Price About to Break Out of Its 10-Year Slumber?Companies / Microsoft Feb 14, 2013 - 03:59 PM GMT
David Mamos writes: Microsoft Corp. (NASDAQ: MSFT) is the world's largest software company. It's also the world's largest afterthought for most investors.
"It's an ancient relic," they say, "Apple and Google are the only games in town."
Or there is always this complaint: "Microsoft has no attractive products and there is no growth"...blah, blah, blah.
This ongoing apathy is one of the reasons why Microsoft stock has been stuck in the doldrums for years.
But if you are willing to look a little deeper, you'll discover this sleeping giant is coming out of its long slumber - and it's hungry.
Don't get me wrong, I'm not going to try and convince you that Microsoft is ready to change its stripes and become a full-scale growth company. Microsoft is what it is - the seller of the market-dominant PC operating system, Windows, and the seller of the market-dominant workplace productivity software, Office.
However, it does have the potential to become a major competitor in future growth markets like smartphones, tablets and enterprise solutions.
The Key to Microsoft Stock
The fuel for Microsoft's future growth is the new Windows 8. It debuted in October 2012 and has sold a solid 60 million licenses so far.
In the long-term, the PC business will slow for Microsoft as the desktop and laptop market loses ground to the booming smartphone and tablet market. But this concern is no longer as much of a worry for Microsoft as it positions itself in this new environment.
Windows is practically the only choice in the PC market, with a combined market share of all PC operating systems of around 85%. Repeat, 85%! Microsoft also holds a 75% share in all operating systems across all devices.
So while there may be a slowdown in PC sales, we are very far away from the point where Microsoft's core business is considered dead. These users are upgrading to Windows 8 and getting accustomed to the new robust features and touch screen display. This increasing familiarity with Windows 8 is of utmost importance, and the reason why Microsoft is no longer as worried about slowing PC sales.
Microsoft will transfer this new Windows 8 familiarity to the smartphone, where it will soon launch its latest edition of Windows 8 in partnership with experienced hardware maker Nokia (NYSE: NOK) and its huge global reach. This partnership has already made significant strides with its current version of Microsoft's phone OS, especially outside the United States.
Many believe the new Windows 8 OS will take Microsoft one step further by putting it in third place behind the Apple iPhone and Google Android platforms. While third may not sound all that fantastic, it is when you think about how dominant the iPhone and Android are. Plus, smartphone and tablet sales are still rapidly growing.
According to comScore, Microsoft had only a 3.6% share of mobile devices as of September 2012. Microsoft's share of this market is unlikely to go lower but it definitely has the potential to head much higher.
Surface Windows 8 Pro
Now once more, transfer that knowledge and familiarity the user has acquired from using Windows 8 on a PC and put it in a tablet.
That is what Microsoft has done with its launch of the Surface tablet last quarter. The number of units sold was cryptically left out of the Q2 report, which does raise some red flags and probable weak sales.
But, the weak sales of the device were probably left out so as to not kill the buzz for this month's release of the company's second version of the Surface tablet, the Surface Windows 8 Pro.
Now why would Microsoft want to take on the iPad?
One reason is that the Surface Windows 8 Pro tablet is not just a tablet. It is also a full PC with a keyboard. If that's not enough to convince you, consider this: it will be the only tablet to run Microsoft Office. Aha!
Now is there a business out there that doesn't use Microsoft's Office?
Sure Google has it's free version, but is there really anybody who actually uses that in a professional environment? Microsoft holds a dominating 95% market share in the global productivity suite market. Any threat from a competitor is very low because Office is light years ahead of the competition and has an immense user base.
So now Microsoft has got you firmly in its clutches. You can get one Surface Windows 8 Pro to replace both your home PC and your tablet, and on top of that you can take it to work with you.
This jibes well with the BYOD (Bring Your Own Device) trend taking place in the office environment, where employees bring in a preferred device they already own and let the IT guys figure out how to integrate it.
To further cement people into Microsoft Office and make its presence more pronounced in cloud computing - Microsoft will launch Office 365 for corporations at the end of February. The idea is that the launch will go hand in hand with increased sales of Surface Windows 8 Pro tablets.
Then there's the recent deal with Dell.
Microsoft's Loan to Dell
Recently Microsoft agreed to give a loan of $2 billion to Michael Dell and partners in order to take Dell Inc. (Nasdaq: DELL) private. This loan will very likely give Microsoft influence over the kind of products Dell brings into the marketplace.
Microsoft, therefore, becomes much more like Apple, in that it will not only have control of its software but also have some control of the hardware. This type of strategy is a bit perplexing since it may alienate some of Microsoft's other partners such as Hewlett-Packard and Lenovo.
But, just like when you're watching a magician, you have to pay attention to what the other hand is doing.
Dell has substantial reach into the business world with its hardware; Microsoft has a strong imprint in the business world with its software. Put them together and you have a considerably sleeker and more efficient solution for IT managers everywhere. This efficiency will be most evident in the fast-growing and competitive cloud computing sector.
As more companies sign up for Microsoft-Dell enterprise solutions, expect more sales of tablets with Windows 8, more sales of Surface 8 Pros and more sales of smartphones with Windows 8. There will be a big advantage of having Windows 8 across all platforms - especially for business users. IT managers know the benefit of supporting only one operating system as opposed to the time and cost of supporting several different ones.
Still Don't Buy the Growth Story - How about Dividends?
It's understandable to think that Microsoft's explosive growth of many moons ago is gone, never to return again. However, if you are a blue chip investor there is a lot to like here.
Microsoft's earnings and revenues are for the most part steadily increasing, and the company continues to make the necessary investments to keep churning out strong performance results quarter after quarter.
The company has an A+ balance sheet by almost everyone's standards. It has nearly 30% of its $229 billion market cap in cash. It has a trailing P/E of 15 and a forward P/E of 8.7.
And here is the fun part; Microsoft is able to raise dividends yearly. The company's shares currently yield 3.4% with a 23 cent quarterly dividend.
Microsoft's share price has gone nowhere for the last 10 years, as the accompanying chart comparing Microsoft versus the S&P 500 illustrates.
It neither participates in broad market rallies nor does it overly participate in market drawdowns - with one exception.
During the market crisis of 2008-2009 it seems as if portfolio managers sold the good with the bad when they sold Microsoft in order meet margin and capital requirements.
The share price quickly recovered to its normal range even sooner than the S&P. Therefore, the downside risk for the stock is, in my estimation, almost non-existent.
So, even if none of Microsoft's plans for growth work out, I'd be perfectly content with clipping my coupons quarter after quarter, without worrying much about a drop in share price.
And if Microsoft's new plan for growth actually starts panning out - where will the share price be then? I think you know the answer.
That's why I am a BUYER of Microsoft.
About the Author: David Mamos brings nearly 15 years of analytical experience to the table with a background ranging from big-picture fundamental analysis to highly technical trading decisions. He began his career working as a financial advisor with Royal Alliance in 2001 and helped clients with portfolio management as well as buy-sell decisions before transitioning to the development, implementation and execution of trading strategies for aggressive investors.
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