3 Reasons to Love Microsoft
Keith is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
I can sympathize with those who hate Microsoft (NASDAQ: MSFT). The company hasn’t always used its power in nice ways. Windows takes too long to start up. Who can forget the awful Microsoft Office talking paper clip? (Sorry to remind those of you who had forgotten.) And don’t get me started on MSNBC.
The stock price has spent more time over the last five years below its current price than above it. And it’s still lower than it was five years ago. There are some good reasons to love Microsoft if you’re an investor, though. Here are my top three.
1. Its Money
Microsoft currently has over $58 billion in cash and short-term investments. More money continues to pour in. Microsoft’s revenues over the past 12 months were $73 billion. With a profit margin near 32%, it gets to keep a significant chunk of those dollars. Levered free cash flow for the last year was $21 billion, higher than the market cap for many S&P 500 companies.
Even better news is that Microsoft continues to grow in the areas that make investors smile. Revenues and operating cash flow both grew around 12% in fiscal year 2011 compared to the prior year. Net income and stockholder equity grew over 23%.
These growth numbers are good, especially considering that Microsoft is long-in-the-tooth for a technology company. Even better is the consistency. The company continues to steadily increase the measures that count.
The thing for investors to really love about Microsoft’s money is what it does with it. In fiscal year 2011, the company returned nearly $17 billion to shareholders through dividends and share buybacks. That represented a 10% increase from the previous year. More share repurchases are on the way. It would not be a surprise to see increased dividends in the future above the current yield of 2.8%.
2. Its Moat
Another great reason to love Microsoft is that it possesses what Benjamin Graham would tell us to look for - a moat. Take a look at the sources for all that money mentioned above.
Microsoft’s largest revenue source is from its business products, which includes Microsoft Office. Microsoft Office has a market share of around 94%. Competing products have come along over the years, but none has managed to knock Microsoft off its perch.
The biggest current threat is from Google (NASDAQ: GOOG) with its Google Docs online applications. Google certainly has the financial resources to mount a challenge to Microsoft. However, Microsoft is fighting back with its launch of Office 365 last year. Google could make further inroads in the business office application space, but it is unlikely that Microsoft will give up market share in a big way.
The second largest revenue source comes from the company's Windows division. Many pundits have proclaimed the imminent death of Windows through the years. They have all been wrong.
Microsoft does face a threat in the emergence of tablet computers. Apple (NASDAQ: AAPL) disrupted the PC market with its introduction of the iPad. Many tablets also use Google’s Android operating system. Both of these competitors are positioned better than Microsoft in the tablet market. And they are already taking their toll to some extent. PC sales to consumers declined 1% in 2011, meaning fewer Windows OS consumer sales.
The folks in Redmond aren’t throwing in the towel, though. First, although PC sales to consumers have decreased, sales to businesses grew 11% in 2011. Most of these computers use Windows. Also, Microsoft is introducing Windows 8, which is designed to be able to power tablet devices. Some analysts predict that there will be over 30 different tablets using Windows 8 by the end of 2012.
Server and Tools includes Windows Server, SQL Server and Visual Studio products among others. The company really doesn’t have a strong moat in this area, but it is competitive. Microsoft is losing market share in the server market to Linux servers. This decline will probably continue.
However, Microsoft’s SQL Server DBMS competes well against major competitors Oracle (NASDAQ: ORCL) and IBM (NYSE: IBM). Oracle has a market share of 50% including its MySQL database. IBM’s market share is 21.7%. Microsoft comes in third with a 17.4% market share but is gaining.
All in all, Microsoft appears to be situated to keep the money flowing in. Some foes will inevitably win some of the battles, but I would put the odds of Microsoft remaining a cash cow for the next decade as very high.
3. Its Mistakes
This one might be surprising, but investors should love Microsoft for its mistakes. To be accurate, we should really love Microsoft for its willingness to take the risks that sometimes result in mistakes.
Microsoft has had its fair share of flops. If there was a Disaster Hall of Fame, the pictures of Zune and Vista could go right beside photos of the Titanic and the Hindenburg. Microsoft Bob could have its own feature exhibit.
But I’d argue that its willingness to take a risk on new ventures is a good thing over the long run. Many people thought Microsoft was dumb to take on Sony and Nintendo in the game market. Yet Xbox became the fastest-selling consumer electronics device in history, according to Guinness World Records.
Some of its current initiatives could join Zune and Bob. Bing, while gaining market share against Google, is losing well over $2 billion yearly. Windows Phone is way behind Apple’s iOS and Google’s Android. The jury is still out on Windows 8 and Azure. Don’t be surprised, though, if Microsoft learns from its mistakes, perhaps makes a few strategic acquisitions, and ultimately gains some measure of success.
Yes, there are plenty of things to hate about Microsoft. There is ample room for criticism even in the reasons I gave for loving the company. If Microsoft didn’t make as many mistakes, its money picture would be even better. If it was more innovative, its moat would be even stronger.
Despite all of this, I still maintain that Microsoft is a good investment. Its forward P/E is a little over 9. Back out its huge cash stockpile and the P/E is around 7. That’s cheap, especially considering its financials. While there are some chinks in the armor, Microsoft’s moat is fairly strong. And although Redmond will probably continue to make stupid mistakes, their batting average isn’t bad and they will hit a home run occasionally. I say keep on hating Microsoft, but buy some of its stock. You’ll love the returns over the long run.
Keith Speights owns shares of Apple. The Motley Fool owns shares of Apple, Google, International Business Machines, Microsoft, and Oracle. Motley Fool newsletter services recommend Apple, Google, and Microsoft. 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.If you have questions about this post or the Fool’s blog network, click here for information.