Microsoft: Betting The Ballmer Bounce

| About: Microsoft Corporation (MSFT)

Microsoft (NASDAQ:MSFT) plummeted 11 percent to a market value of $261 billion - 58% off its peak of $616 billion in December 1999, one month before Steve Ballmer took over as CEO. In May 2012, Forbes declared Ballmer No. 1 of "Five CEOs Who Should Have Already Been Fired." Then came the disastrous release of Windows 8 and its own Surface RT tablet.

Focus on Microsoft's bad news and miss the chance to bet the Ballmer bounce.

Microsoft stock is cheap

The world is shifting to mobile where Microsoft lags badly. But in the corporate world its operating systems and applications software bring in massive cash. [Kiplinger] Even with a lackluster debut, Windows 8 still sold over 100 million licenses by May, pushing earnings to record levels. The reason may be the one metric Robert Kleinschmidt of Tocqueville Asset Management applies when considering its value: market share. [Forbes]

Say what you will about Microsoft, it still has gobs of market share. Consider that Microsoft:

  1. has grown earnings per share by 11% since 2003; 14.5% since 2008

  2. at $31.40 per share generated $2.60 in profits, $0.92 of which returned to shareholders

  3. has a price/earnings (p/e) ratio of 12

Behind-the-scenes businesses are thriving: in the first quarter, the server and tools division grew 11.2% while the business division grew 8.2% [The Motley Fool]. With Microsoft you're getting 8.28% starting earnings yield plus future earnings per share growth [RaduTyrsina]. Kiplinger concurs: "The stock is plenty cheap, and Microsoft has raised its dividend at a 21% annual clip over the past three years" [Kiplinger].

Xbox puts Microsoft in our living rooms

Catch-up products like Windows Phone 8 and mobile Windows 8 aside, Xbox One could define the future of television and gaming. Long the goal of Apple (NASDAQ:AAPL), Sony (NYSE:SNE) and Google (NASDAQ:GOOG), hoping to create a living room hub connecting us to the world, Microsoft looks positioned to succeed at bringing gaming, television, and streaming media onto one device.

While others stumble:

---Steve Jobs envisioned a device that would seamlessly sync iDevices and the iCloud, but two years on we're still waiting, the long-rumored iTV not even on the horizon

---Google tried with Google TV, but the product lacked functionality and never gained traction

Meanwhile Microsoft has given us a compelling product with Xbox One. As The Motley Fool sees it:

The importance of Xbox One can't be understated. What Microsoft is trying to do is create an ecosystem that rivals Apple or Google's, drawing consumers in and making it more appealing to buy other Microsoft products. Xbox One will be the center of that sales pitch and should help mobile device and cloud sales in the process.

Xbox One could be the consumer product home run Microsoft needs [The Motley Fool].

Microsoft has huge amounts of cash

Microsoft sits on $77 billion in cash. It spent more than $10 billion on research and development in fiscal year 2013. Microsoft could buy Yahoo! (NASDAQ:YHOO) at its current $32.1 billion market value and still have almost $45 billion left over.

The pile of cash gives the company flexibility. The 35% payout ratio yields nice dividend growth over the medium term. Stock price has been beaten down to a point where not a whole lot has to go right over the next five to 10 years for you to do well, just: [RaduTyrsina]

  1. future growth beating pessimistic expectations
  2. accelerated dividend payout ratio, or
  3. utilization of cash for a big buyback

The stock might move in a tight band for a while, never going stratospheric nor falling much. But by buying Microsoft now and holding, you might be able to play the Ballmer bounce.

Betting the Ballmer Bounce

What happens with CEO Steve Ballmer could add quite a bounce in Microsoft:

  1. Ballmer Goes: Probability: 20%. Stock bounce: 30-40%.
  2. Bill Gates Returns: (Ballmer returns to former role) Probability: 10%. Stock bounce: 60-70%.
  3. Ballmer Buys Something: he swings for the fences and buys International Business Machines (NYSE:IBM) Probability: 20%. Stock Bounce: 50%.

Whatever way you work the probabilities, while holding your Microsoft stock (which should make you good money meantime) consider how much the stock might soar betting the Ballmer bounce.

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.

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