Microsoft Never Stopped Innovating: Still A Good Value Stock
Microsoft (MSFT) has had a huge impact in everybody's lives in one way or another, and currently the company is being blamed for lacking innovation. The investors haven't been too kind to the company either. In the last 10 years, Microsoft's stock price appreciated by a measly 6.45% despite the company's generous dividend payments. Let's take a closer look at Microsoft (click to enlarge image):

Past of Microsoft
In the last decade, Microsoft's book value grew from $54.30 billion to $64.12 billion. This translates into a growth of 18.09%, which is less than 2% per year. The company's revenues grew at a much faster rate within the same time period, up to $20.89 billion from $7.25 billion. This is a growth of 188%. Furthermore Microsoft's EPS (TTM) grew by 380% from 57 cents to 2.76 during the same period. At first, this may sound impressive, however keep in mind that the huge EPS growth of Microsoft carried the company's P/E value from 52 to 11. This means the company might have been overpriced 10 years ago and its price might have been closer to its fair valuation at the moment. In addition, Microsoft's free cash flow grew by 93% in the last decade. This means Microsoft kept growing at a decent rate in the last 10 years in terms of earnings, revenues and free cash flow.
Present of Microsoft
The perception investors usually have of Microsoft is a company that stopped innovating and growing long time ago. However, this may not be all that accurate. Currently there are several avenues that help generate revenues for the company:
- Microsoft develops, licenses and supports its software products.
- Microsoft offers a wide range of IT services to individuals and organizations.
- Microsoft designs and sells hardware products such as its game console XBox.
- Microsoft offers online advertising through many avenues including its search engine, Bing.
In the last quarter, Microsoft's revenues grew by 5%. The growth was stronger in emerging markets than in developed nations.
Future of Microsoft
There are several items that shed light into future growth opportunities of Microsoft.
Microsoft signed an agreement with Nokia (NOK) to form a strategic alliance in mid 2011. According to the agreement, the two companies will produce and sell mobile phones and systems together. More specifically, Nokia will produce Windows phones with help of Microsoft, and Microsoft will get licensing fees from Nokia. This move will allow Microsoft to increase its presence in the mobile phone market. In fact, Nokia already started production and sale of these phones. This will also generate additional advertisement revenues for the company.
Microsoft currently offers a product called Windows Embedded Automotive, which allows many functions in cars. Currently Ford's Sync system runs on Windows Embessed Automative. This system allows many features to car drives including hands-free calling, audible sms messages, instant voice recognition and being able to listen to music through one's ipod. In the future, this will be a growth avenue for Microsoft as many people in the World are replacing their older cars with newer ones.
Microsoft's penetration into emerging markets will help the company's growth in the future. There are many companies in these markets that keep growing and in need of strong software and network services. The company's business application products such as Exchange, SharePoint, Lync and Dynamics CRM will continue to post strong revenue growth in the near future.
Microsoft's business infrastructure solutions such as Windows Server, Hyper-V and System Center contributed greatly to the company's recent growth and they will continue to do so for a long time. The company reports that there is very strong demand for these products at the moment.
In 2012 and beyond, the company's new products Windows Server 8, SQL Server 2012 and System Center 2012 should help it gain significant market share among businesses.
A Word on Competition
Microsoft is a technology company and there is great amount of competition in every facet of technology. For example, Microsoft's main product The Windows operating system has two major competitors Apple (AAPL) and Google (GOOG). The company's business networks, software and infrastructure competes with IBM (IBM), Oracle (ORCL), Hewlett Packard (HP) among others. Microsoft's gaming and entertainment system, XBox, faces competition from Sony (SNE) and Nintendo (NTDOF.PK). Furthermore, the company's mobile phone alliance with Nokia faces competition from Apple, Samsung, Google and other major players.
Apple's products compete with Microsoft at every level. It's phones, software, operating system and hardware compete directly with Microsoft. Apple is gaining market share very rapidly, however Microsoft still has a very large audience who cannot afford Apple's expensive products. I believe the biggest threat to Microsoft's business sector comes from IBM. (Please see my IBM article for a further analysis of the company.)
The company has to reinvent itself in order to keep competing with these major players. So far, it's been doing a fine job at that.
Conclusion
I believe that Microsoft never stopped innovating or growing. The perception of Microsoft in the market is somewhat inaccurate. Moreover, the company has healthy finances and strong dividend growth history. Analysts generally rate the company as Buy or Hold with median target price of $34 which provides an upside of 10% from its current price. I believe Microsoft is a good value stock and I recommend it to most investors, particularly dividend investors.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
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