Why Microsoft Is Severely Undervalued

| About: Microsoft Corporation (MSFT)

I know you've all heard this before, but I would like to definitively explain how Microsoft Corporation (NASDAQ:MSFT) is among the most underrated and undervalued companies out there.

In the technology industry, groundbreaking developments leading to massive paradigm shifts can often cause unknown companies to skyrocket, as well as damage or even destroy existing ones. First it was IBM (NYSE:IBM) that ruled technology, and was dethroned by Microsoft. Now, companies like Apple (NASDAQ:AAPL) and Google (NASDAQ:GOOG) have benefited greatly from the recent and incredibly rapid mobile revolution. Microsoft, on the other hand, who dominated and relied on markets (namely the desktop OS) that the aforementioned mobile sweep is cannibalizing, has seen a decline in stock value, and yet a steady rise in revenue and profit. Why is this so? Obviously, many people don't think that it holds any future value, which I highly disagree with. First let's examine their financials.

Microsoft is an extremely strong company, financially speaking. They have cash reserves in excess of $50 billion. They are an active and major player in the M&A department. They continue to produce new company records in terms of earnings, while keeping up a steady growth. Last quarter (FY 2013 Q1), its EPS (earnings per share) was $0.53 on revenue of $16 billion and net income of $4.5 billion. On the other hand, its market value is about $220 billion, which is $50 billion less than half Apple's and just slightly more than Google's. For a company with financials like Microsoft's, with earnings much better than Google's and slightly less than Apple's, that is low value. Its P/E ratio (at the time of writing) is a relatively low 14.3. What a low ratio means is that a company is either headed for trouble or undervalued. In the case of a company as healthy as Microsoft, it's the second one. Compare that 14.3 to Google's 21.8. If Microsoft were valued at the same rate as Google, it would be worth about $335 billion. I will reiterate: the market believes these companies have a better outlook in the coming years than Microsoft. However, I strongly think that Microsoft has a great future.

The reason for my bold optimism is their already massive and still-improving position in the technology world. Windows 8 is supposed to be a super hit and by my usage, a superb product. It also brings a plethora of excellent devices, such as Ultrabooks, notebooks, tablets, convertibles, and regular desktops. Their in-house Surface RT tablet may not have been much of a success in itself, but it's an excellent tablet notwithstanding. And the one that was expected to be the more successful in the Surface duo, the Ultrabook/MacBook Air competitor Surface Pro, hasn't even come out yet. More importantly, it shows that Redmond has the innovative capabilities to create spectacular products. Take Windows Phone 8 as another example. It has been selling extremely well, with the Nokia (NYSE:NOK) partnership paying off especially well. In fact, the Lumia 920 has become the 3rd most popular device in AT&T (NYSE:T) and is sold out in many places. These products, along with a new upcoming office, will, in my opinion, provide strong growth and premium on stock prices.

Like all investments, however, it isn't completely risk-free. Bears will contend that Redmond is churning out lackluster products and its stock growth prospects don't compare to that of its competitors, as well as its year over year increase in earnings. While I disagree with their outlook, I believe it is important to treat Microsoft like any other stock and invest cautiously. With that said, I still think Microsoft is a strong buy.

Disclosure: I am long MSFT. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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