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Microsoft released earnings after the bell yesterday. Earnings were up 31% and revenue posted an impressive 13% advance. The stock fell a bit in after hours due to a decline in revenue from the division that sells its Windows OS.
I recently posted an article on why I thought Microsoft was a screaming buy. The recent earnings report confirms my view, and I think several positive developments were overshadowed by the concerns on the effects of the migration to Tablet PCs will have on revenues from Windows.
First of all, the threat from Tablet PCs is real if not overstated. The IPad (NASDAQ:AAPL) is on its way to change the world and the way it does business in a variety of ways. However, the PCs and notebooks that are Windows' bread and butter are not going to disappear overnight. MSFT’s revenue decline in Windows was just slightly more than the decline in PC sales.
In addition, Microsoft had a great quarter. How many 200B-plus companies post earnings growth of over 30% and revenue growth in the double digits? (Apple excluded of course; it is just a juggernaut right now.) Here are four things the market is missing on MSFT.
  1. The company is selling at 8 times this year’s earnings after you strip out net cash. Think about that: 8 times earnings for a company producing double digit revenue growth, paying a respectable 2.4% dividend, consistently beating earnings estimates, and with exciting technology.
  2. Its Business Services division powered by its Office franchise produced a 21% increase in revenue. Servers & Tools posted a double-digit increase of revenue as well.
  3. MSFT’s online division motored ahead with a 14% gain in revenue as it is gaining traction in search. Although operating at a loss, this is one of core areas where Microsoft has a huge opportunity. If Bing continues to gain market share, as it has over the last six months from Google (NASDAQ:GOOG), this could be a game-changer
  4. Most importantly in my eyes, Microsoft’s Gaming & Entertainment division posted a 60% increase in sales, driven by its Kinect technology. Given the recent problems at Sony (NYSE:SNE) Playstation, Microsoft is about to become the 800-pound gorilla in this space. Its Kinect technology is also going to be one of the top five tech stories of 2011 and beyond when all is said and done, in my opinion. The uses for it extend way beyond gaming. I was at a conference yesterday at the Four Seasons keynoted by the governor. With the exception of the IPad, the number one technology people were talking about was Kinect. This technology will evolve into a platform to support many interesting functions, including physical rehab at home.
Microsoft is the rare large-cap stock with core franchises, solidly growing revenues and earnings, a fortress balance sheet with exciting technology --.all for 8 times earnings sans cash. Next stop is $35 a share over the next 12 months, in my opinion. A strong Buy.
Disclosure: I am long MSFT.
Source: Microsoft After Earnings: Still a Screaming Buy