With a closing price of $26.52/share, Microsoft (MSFT) is now at its lowest price of 2012. It hasn't been trading this low since the first week in January. The company is now down about 20% in price from April 2012, when it peaked at over $32/share.
So what gives? There are some recent developments in the company which have caused an increased level of fear about its near term prospects:
- Windows 8 is out, and consumers are not waiting in line to get a copy - A recent poll just released by antivirus company Avast indicates that current US consumers with older versions of Windows are not running out to upgrade. Only 9% said they planned to buy a new PC including Windows 8, and nearly 70% indicated for now they would stick with what they have.
- Executive Steve Sinofsky, head of the Windows division, is gone - A seemingly key person at Microsoft who many thought might one day lead the company after current CEO Steve Ballmer has suddenly left. The timing is particularly worrying to some, who speculate it might indicate yet unknown issues with Windows 8. Sinofsky claims to have left on his own accord, but few believe this. Seems to be a similar situation as with the departure of iOS chief Scott Forstall from Apple (AAPL).
Besides these specific points, not helping the stock has been the overall market decline of about 8% in the past 2 months.
As many a value investor is aware, Mr. Market has his moods, and frequently the short term view of a company causes unwarranted dips in price. This presents a buying opportunity, as when others are fearful it is the time to consider "doubling down". Here are 5 reasons that I believe investors with a longer term horizon should not only stay the course with Microsoft, but should now even consider to be bold and go overweight on the company:
- History tells us that it is much too early to be negative on Windows 8 - It amazes me how after only a few weeks on the market, people can already be speculating on the success of Windows 8. History has taught us, that technology adoption is not always instantaneous. As a commentator pointed out on a recent Nokia (NOK) article of mine, the 1st generation Lumia line sold 10 million units in 4 quarters. The 1st generation iPhone sold 6 million units in 5 quarters. Granted of course the overall market for smartphones is now significantly higher when the first Lumia came out then it was several years ago when the iPhone entered the market. However this example goes to show that we really need a full year before Windows 8 can be fairly judged on its full success and impact as a disruptive technology. At this point we just do not yet know what its true impact will be. In addition to this, the departure of Sinofsky is almost certainly about politics, and not the product itself. At this point, Windows 8 is past the engineering phase and is really in the hands of the marketing and licensing folks. So the timing is not really that unusual, and it shows that the company is not afraid to make bold moves at the management level. Sinofsky was not known as a team player, and this move could allow for better collaboration between divisions, which certainly is necessary as the traditional lines in technology are being blurred with the cross linking between tablets, smartphones, and traditional desktop PCs.
- The company is too cheap to Ignore - With a forward P/E now at 8.19, and cash per share of 7.85, the company is trading at a near ridiculous valuation currently. The EV/EBITDA is now 5.93. This for a company which has EPS growth estimates of near 9% from 29 analysts over the coming 5 years, and has seen FCF growth of 16% in the past 12 months.
- The enterprise business remains very strong - Looking at how cheap the company is trading at, you would think the core business is suffering. As I highlighted in detail in a previous SA article, Microsoft's core strength is the incredible competitive advantage and moat that is enjoys in its enterprise focused divisions. About 60% of revenue and more than 70% of operating cash flow comes from the business services division and the servers and tool segment. This gives the company a lot of downside cushion, as these are steadily growing businesses not directly related to Windows. The competitive moat of Microsoft here is very strong, as it has a leading market position not only in MS Office, but also has a healthy growing business in cloud computing, enterprise content management software, and also social collaboration and communication technologies. So even if Windows 8 does get off to a slower start than expected, it doesn't really matter. This cash cow will keep right on milking.
- Dividend keeps increasing - Microsoft has quietly become a very nice dividend growth company. With a yearly dividend now at 0.92/share, this has increased an impressive 77% in only 3 years. The yield is now a healthy 3.40%. The payout ratio also remains a modest 43%.
- The balance sheet remains rock solid - Total debt stands at $12.37B. Debt/equity ratio is only 0.18, and the current ratio is 2.68. With cash of $66B, and yearly free cash flow over $24B, there remains ample room for further dividend increases, share buybacks, or acquisitions to act as catalysts going forward.
With Microsoft, I think investors need to look at the big picture. Here is company with a stable and solid enterprise business that is generating lots of cash and will not be going anywhere anytime soon. There is also still ample time in the coming year for the company's newly released products, such as Windows 8 and the Surface tablet, to gain traction in the marketplace. So there are clearly opportunities for positive catalysts to help the share price. While waiting you own a company with increasing dividends which is conservatively financed and clearly has no balance sheet risk. Putting all of this together, for me it is just a no brainer to be bullish on Microsoft. With the attractive price Mr. Market has now given us, it is therefore definitely time to back up the truck and load up on shares.