Reasons To Add Microsoft To Your Stock Portfolio

May.29.13 | About: Microsoft Corporation (MSFT)

Microsoft (NASDAQ: MSFT) is a stock that many investors have already written off as the company itself has lost ground to rivals such as Apple (NASDAQ: AAPL) and Google (NASDAQ: GOOG). However, with the release of new versions of Windows and Xbox, the company is trying to make itself relevant again. But are these efforts enough to turn Microsoft around? Should you be considering adding Microsoft to your investment portfolio?

The fall of Microsoft

In the 1990s, Microsoft dominated the personal computing field with its Windows OS and Microsoft Office suite of desktop applications. But in the 21st century, the tech company quickly fell behind its rivals as it contented itself with pumping out new versions of Windows and Office. Meanwhile, Apple and Google were bringing innovative new products and services to the market. As a result, Microsoft saw its fortunes decline in the first decade of the new century. Consider that in December 2000, Microsoft's market capitalization was $510 billion, which made it the world's most valuable company. Its current market cap is $286.2 billion, a 43% decline. Apple, on the other hand, started the new century with a market cap of $4.8 billion. At present, this has grown to $417.8 billion.

What happened? Basically, with success, Microsoft lost its edge and evolved from a company that was run by young visionaries to a bureaucracy that rewarded officers who maintained the status quo. This was not to say that the company had no successes. The Xbox 360 became the best-selling gaming console on the back of features such as allowing players to compete with each other online and innovations such as the Kinect, which used gesture controls. Its Windows Azure was a cloud computing platform that allowed subscribers to manage and deploy applications through Microsoft's network of data servers. However, these successes were more than offset by massive losses from Microsoft's attempt to compete with Google, Bing. It has been reported that the company was losing as much as $1 billion per quarter on the search engine, although the losses have been slowing down in recent years.

Meanwhile, Microsoft was also not able to come up with a response to Apple's iPhone and iPad products, leaving its PCs to look like obsolescent dinosaurs by comparison. It is against this backdrop that many analysts have declared the company as dead money. But is it, really?

Microsoft Remains Profitable

One thing that most doomsayers have failed to consider about Microsoft is that it has remained profitable and even consistently grown its revenues and profits. In fact, it only reported its first quarterly loss in its history in the second quarter of 2012. Previous to that, Microsoft had not reported a loss since it started trading publicly in 1986.

And with the release of the Xbox One, Microsoft hopes to regain some of the technological edge that it has lost with the introduction of the iPhone and iPad. The Xbox one is a gaming console that also integrates video streaming and television capabilities onto a single device, making it a viable alternative to the traditional cable boxes and a rival to Roku. And it hopes to draw in users of other devices with its Smartglass, which allows the Xbox One to interact with mobile devices using Android and iOS operating systems.

Meanwhile, its core divisions continue to be profitable. Microsoft's server and tools division experienced 11% growth, while its business division grew by eight percent. Although its Windows 8 has failed to catch fire, its MS Office continues to be an important productivity tool used in many offices.

The stock valuation also remains attractive. Apart from its high market capitalization, Microsoft also has $59 billion of net cash and has made some $16.4 billion in net income over the past year. Its forward P/E is at 11, which is a good value for a company whose growth is in the high single digits. Microsoft is currently trading at $34.27, at the higher end of its 52-week range.

The Bottom Line

While Microsoft is no longer as cool as rival Apple, it still remains a solid business whose core divisions still generate reliable profits. And it may regain some of the technological edge that it has lost with the Xbox One. Plus, it has a bit of a secret weapon with Skype, which may eventually displace traditional telephone services. Users of the popular communications service logged some 120 billion minutes of calls, an increase of 58% from the same period last year. Xbox One also has Skype functionality, which allows users to conduct HD chats using the Kinect camera and the Snap feature allows them to do so even while watching TV or playing games.

Microsoft still has to overcome many challenges that could threaten its profitability. But if it is able to succeed with Xbox and make inroads in the mobile computing market with its Windows 8, Microsoft shares would make a great asset to your investment portfolio.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. 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.