Short And Sweet: Microsoft Cuts 18,000 Jobs

Jul.21.14 | About: Microsoft Corporation (MSFT)


Microsoft is removing the shackles that have held it back for so many years.

The company's announcement to slash thousands of jobs, while unfortunate for many, are necessary in the fast-paced world of technology.

We continue to like Microsoft's shares and think new CEO, Satya Nadella understands what it takes to be successful in a "mobile-first and cloud-first" world.

Quick and agile - that's what's the new Microsoft (NASDAQ:MSFT) memo to employees; the company revealed the largest layoffs in its corporate history, targeting the reduction of the size of its overall workforce by up to 18,000 jobs. The work toward synergies and strategic alignment on its recently acquired Nokia (NYSE:NOK) Devices and Services operations is expected to account for 12,500 job cuts, comprising both professional and factory workers. The vast majority of employees will get the pink slip over the next 6 months.

Though it is never pleasing to hear that workers are losing their jobs, from an investment standpoint, we think the job cuts are necessary. Microsoft is currently benefiting from the greatest fundamental momentum that it has experienced since the dot-com bust, and we think Satya Nadella knows he must continue to push forward a culture of innovation and reinvention. Microsoft now competes in almost every technology vertical, from Apple (NASDAQ:AAPL) and Google (NASDAQ:GOOG) (NASDAQ:GOOGL) in operating systems to Sony (NYSE:SNE) in gaming consoles and beyond. Microsoft will also now have fewer layers of management to accelerate the flow of information and decision-making. We view this change as a necessity in today's fast-paced "mobile-first and cloud-first" world of technology.

Valuentum's Take

We're never happy to hear people losing their jobs, but we believe the cuts are necessary and critical to Microsoft realizing the synergies attached to the acquisition of Nokia's Devices and Services operations. The size of the layoffs is certainly a needle-mover as it relates to cost containment. Our most recent estimate is that Microsoft's worldwide headcount was close to 100,000 as recently as June 2013, so it will part with between 15%-20% of its staff.

Our fair value estimate of Microsoft is $48 per share, slightly higher than where it is trading at present. The technology giant currently yields ~2.7%, and we expect dividend growth to remain robust for the foreseeable future. The company remains a top holding in the Dividend Growth portfolio.

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