How Microsoft Is Out-Gaining Google And Could Soon Outgrow It

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 |  About: Microsoft Corporation (MSFT), Includes: AMZN, CRM, GOOG, GOOGL, SAP, YHOO
by: Dana Blankenhorn

Summary

Microsoft has suddenly shown flexibility.

Windows 9 has a huge opportunity for profitable growth.

Microsoft is innovating again.

Microsoft (MSFT) is suddenly wired, and Google (NASDAQ:GOOG) (GOOGL) is suddenly tired.

While Google struggles with demands from government and the jealousy of competitors, Microsoft under Satya Nadella suddenly has its act together and is attacking on all fronts.

At CompuTex in Taiwan, the company showed a range of devices demonstrating that business users won't pay a premium for Windows gear.

At E3 in Los Angeles next week Microsoft's Xbox will dominate the show floor and Microsoft will announce several new game ports to Windows, including Kabam and Orbotix' Sphero.

Microsoft quietly negotiated with Apple (NASDAQ:AAPL) to make its Bing, not Google, the default search engine on new iMacs. Bing has already relegated Yahoo (YHOO) to third in the U.S. search engine market.

In the last week, Microsoft has quietly made big cloud deals with Salesforce.com (CRM) and SAP (SAP). Its Azure cloud is showing it can compete with Amazon.Com (AMZN) through flexibility.

The company even has some gee-whiz tech of its own, a version of its Skype phone system that does automatic translations.

Most of these deals are of a type former CEO Steve Ballmer would never have made. New CEO Satya Nadella has scrapped Ballmer's playbook, his demand for "Windows Everywhere," for one where Microsoft will go to customers with whoever it can.

But if you want to know the real opportunity before the company, all it takes is one chart. It comes from Net Applications, and shows that Windows still dominates the desktop, and that half the market has yet to advance off Windows 7.

While Windows 8 is widely considered a failure, and Windows 8.1 is not doing much better Microsoft is already working on Windows 9, due next year, which is rumored to be bringing back the old Start menu and running much tighter.

If it can lure a big portion of the Windows 7 crowd to upgrades, Microsoft could easily start growing both its top-and-bottom lines, where it is currently stuck in neutral. The first quarter of 2014, for instance, saw sales of $20.40 billion, and net income of $5.66 billion, 68 cents per share. Compare that with the previous year - revenue of $20.49 billion, and net income of $6.06 billion, 72 cents per share.

Investors have been buying Microsoft as a yield stock, its 28 cents/share dividend now yielding 2.78%, and giving it a market-average price-earnings (PE) multiple of 15.11.

That's half the multiple of Google, because the smaller company (yes, Google is still smaller) grew its top-line nearly 20% year over year, to $15.42 billion from $12.95 billion, even while its bottom-line growth stopped, with net income of $3.45 billion, $5.33/share, compared with net of $3.35 billion, $5.24 per share, a year earlier.

The moves Nadella is making could easily produce profitable growth of 10%, and combined with its dividend policy make the stock a bargain next to Google by this time next year.

That's why, for the year so far, Microsoft shares are up 7.7% while those of Google are actually down 2.64%. Investors are smelling a bargain.

Disclosure: I am long GOOG, GOOGL, AMZN. 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.