There is Value in Microsoft
Andrés is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Microsoft (NASDAQ: MSFT) has missed many fabulous growth opportunities in the last years, and investors have solid reasons to feel disappointed about that. On the other hand, it's still a very profitable company with enormous resources and plenty of opportunities for future growth if management makes the right choices. Trading at very attractive valuations and with many product upgrades planned for the next months, it may be a good time to consider a long position in Microsoft.
There was a huge opportunity in search and online advertising, and Google (NASDAQ: GOOG) made something spectacular out of it. Google has a dominant position with almost 70% of search queries, while Microsoft and Yahoo are closely competing for the second place, with both of them trying to place themselves above a 15% market share level. This is only if we consider desktop search, if mobile search was included the data would look even better for Google.
Speaking about mobile computing, Google and Apple (NASDAQ: AAPL) are sharing the leadership in that lucrative business, while Microsoft is coming very late to the game with its alliance with Nokia (NYSE: NOK) to produce smart phones operated via Windows Mobile. Both Microsoft and Nokia have been doing quite badly in smart phones, so this alliance could be a desperate last attempt to gain some relevance in the business.
Apple gave another big hit to Microsoft when it launched the iPad, inventing an entirely new product category in which Microsoft has almost no presence at all. The iPad competes against PCs and laptops to some degree and even sales of Mac have been growing faster than windows operated PCs. Microsoft has been losing market share to Apple in both mobile and desktop computing lately.
The last decade was full of bad news for Microsoft investors, but it may be time to revisit this position because the stock is currently cheap and still growing. Microsoft trades at a forward P/E ratio below 10.5, which is quite low by historical standards and also low in comparison to other big tech stocks. Dividend investors may want to pay attention to the company´s dividends, since they have a lot of upside room.
The company is a cash machine and has abundant potential for dividend increases in the middle term. With a dividend yield of 2.5% and a payout ratio of 29%, investors will probably receive increased payments in the future. Microsoft provides a relatively new dividend, with only 7 consecutive years of increases, but the company announced a very juicy 25% raise in dividend in the third quarter of 2011 which supports the idea of Microsoft as a dividend growth stock.
Microsoft may have lost many important battles in the war for consumer´s pockets, but it’s still a very strong player in the corporate sector: The Business Division showed a 9% increase in sales for the last quarter, while Servers and Tools reported a 14% increase in revenue.
Areas like cloud computing should provide many growth opportunities in the future, and Microsoft has developed competitive products and deep commercial relationships in the corporate sector, so it’s well positioned to keep growing in that business.
Games is another business segment which could keep growing in the future. Microsoft has been quite successful with the Xbox and there are many opportunities to integrate consoles into other entertainment products. The company needs to update its products in that division, though, because it has been losing some share lately.
Windows lost a lot of ground in the last years, but it´s still showing positive growth of 4% in the last quarter. With new products like Windows 8 expected for 2012, maybe we are about to see better times ahead for old Microsoft´s operating system as most low cost computers still use Windows and Apple will hardly start competing in the low price segment.
Microsoft is not dead at all. It may be struggling to adapt to a changing world, but the company is profitable and financially solid. Long term investors with a focus on valuation ratios and dividend growth could take a look at this fallen star now trading at historically low valuation ratios.
acardenal has no positions in the stocks mentioned above. The Motley Fool owns shares of Apple, Google, and Microsoft. Motley Fool newsletter services recommend Apple, Google, Microsoft, and Nokia. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.
