Can Microsoft’s All-Out Attack Gain Ground?
Meena is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Microsoft Corporation (NASDAQ: MSFT) has a reputation as a boring, mature company that does nothing more than rake in cash from its Windows and Office business units, return a share of the cash to investors through dividends, and keep the rest in an ever-growing cash hoard. The stock’s history is incredibly consistent, with the price essentially unchanged from five years ago. Rival Apple Inc. (NASDAQ: AAPL), of course, has spent those five years rocketing up about 350%. At the end of the first quarter Microsoft ranked in the ten most popular stocks among hedge funds, thanks to the 103 hedge funds that reported a position on their 13F filings.
But Microsoft seems to have made some New Year’s resolutions to get off the couch this year and is at least making an effort at rejuvenating the company. The roll-out of Microsoft’s new Surface tablets demonstrated that the software giant will try its hand at hardware and in providing a tablet. The theory goes that the same business and productivity focused customer base that still picks PCs over the artsier Macs will choose the Surface and its physical keyboard over the iPad, the Kindle line from Amazon, Google's (NASDAQ: GOOG) yet-to-be-announced tablet offering, and every other option in the market. Read more about Surface and Microsoft's other hardware projects.
Microsoft has also been steadily building its networking capabilities, again with an eye for the office crowd. Last year it purchased Skype; in June it purchased Yammer, a social networking site that links employees of large corporations; it recently announced that the next version of Office will integrate with LinkedIn (NYSE: LNKD); and it continues to own a stake in Facebook (NASDAQ: FB), which it uses to improve its Bing search engine. While Facebook’s stock has come down to earth since its IPO, Microsoft’s investment came at only a $15 billion valuation, and the company may have cashed out a number of shares in the IPO, making it a remarkably profitable investment for the software giant.
We’ve mentioned Office, and of course even without Microsoft’s various initiatives, 2012 would be a big year with the next versions of Windows and Office coming out. There has been a variety of reactions to Windows 8 ranging from generally impressed to concerned that many users will have difficulty with the interface. Office 2013 is receiving a similar variety of reactions. Of course, as with previous incarnations of these products, a large part of the customer base will eventually order the product as long as it is at least acceptable.
Microsoft’s 10-K (the company’s fiscal year ends in June) reported a third consecutive year of revenue growth, at a 5% rate compared to the previous year, though goodwill impairment charges resulted in a decline in earnings. A slight decline in the Windows-related division (which may be related to customers waiting for the release of the next version) was offset by strong server performance. Revenue increased, but margins decreased in the company’s online and gaming segments; Bing, including the Bing-powered Yahoo, is struggling to compete with Google’s search, while the Xbox has taken the #1 position in console systems market share both in the U.S. and now worldwide.
Sell-side analysts are bullish on Microsoft overall as it carries a forward P/E of 9 compared to its trailing P/E of under 15. This is competitive with Apple’s respective multiples of 11 and 14 and Google’s of 13 and 19, but the latter two companies managed to grow their revenues in their most recent quarters compared to the previous year at double-digit rates. Their growth is dependent on continuing existing growth, while Microsoft’s depends on introducing a number of new products and hopefully seeing them succeed and at least meet Wall Street’s expectations.
So far, despite all the sound and fury, Microsoft stock is about even with the NASDAQ for the year. We think this is a pretty fair assessment; it’s one thing for Microsoft to be rolling out a number of new products and initiatives and another thing entirely for them to be executed well and bring in sales. We don’t even have firm numbers on Surface’s pricing to analyze how it stacks up against the iPad, and we don’t have information about what Google in particular will bring to the tablet wars. With the profitability of Windows and Office likely baked into the existing stock price, we would only recommend Microsoft to dividend growth investors who want some exposure to the various segments Microsoft serves.
This article is written by Matt Doiron and edited by Meena Krishnamsetty. Meena has long positions in Apple, Google, and Microsoft. The Motley Fool owns shares of Apple, Facebook, Google, LinkedIn, and Microsoft. Motley Fool newsletter services recommend Apple, Facebook, Google, LinkedIn, 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.