Is Microsoft Still a Growth Company?

Microsoft's (MSFT) Q1-Y2008 results beat market expectations and, more importantly, the software giant raised its outlook (see conference call transcript). Naturally, the market got excited and rewarded MSFT with a gap up on October 26th on huge volume. But can a giant of this magnitude still be a growth company? Revenue increased by 27.3% and net income surged by 23.3%.

Company Profile

Microsoft Corporation provides software products for computing devices worldwide. Its Client segment engages in technical architecture, engineering, and product delivery of the Windows product family comprising of Windows Vista; Windows XP Professional and Home; Media Center Edition; Tablet PC Edition; and other Windows operating systems. Further, Microsoft offers online advertising and publishing solutions. It has strategic alliance with Siemens VDO Automotive AG; Phase One A/S; LogicaCMG plc; and AudioCodes, Ltd. Microsoft was founded in 1975 and is headquartered in Redmond, Washington.

Fundamental Analysis

The following reports are as of September 30th 2007 results:

Financial health:

• Current Ratio = Current Assets/Current Liabilities = 1.57
• Total Liabilities/EBITDA Ratio = 1.52
• Total Liabilities/Operating Cashflow = 0.77

It's hard to question Microsoft's financial health. All signals look green here.

Profitability

• TTM Sales growth: 5.7%
• Last year Sales growth: 15.45%
• Latest quarter over year ago Quarter sales growth: 27.3%
• TTM Operating Margin improvement: 1.91%
• TTM Return on Asset: 22.66%
• Last 2 year Gross Margin: 80.9%
• TTM Gross Margin: 78.4%
• Last 2 years Net Margin: 28%
• TTM Net Margin: 27.5%

The TTM sales growth does not show a bright picture, but look at the latest quarter over year ago quarter sales growth. Sales have picked up mainly in the last quarter (i.e. Q1 Y2008). Even more stunning is the ROA growth. For a little more than a year now, MSFT has been operating at 22% ROA. Prior to this, MSFT had ROA of 8.6%, 17.3%, 18.1% 22.2% for 2004, 2005, 2006, 2007 respectively. Not sure if ROA has any predictive power, but it indicates efficiency in turning assets into returns.

Analysts Rating

• Strong Buys: 9
• Buys: 5
• Hold: 4
• Sell: 0

The recent momentum in Microsoft's stock price indicates a lot of attention from investors, and probably from institutional investors too. And all that attention seems to be good.

Weakness/Threats

Microsoft benefits from three main product lines. Its Windows and associated softwares, entertainment device units and online services. The big revenue chunk is from the Windows software, and the fastest growing segment is the entertainment device section that sells Xbox, though all the other segments are growing well too. In order to support sustained growth at Microsoft, all product lines will have to grow beyond the holiday season. And to put this jumbo company into a good growth play, all the product engines need to be firing on all cylinders for months to come. What are the chances of that?

Technical Analysis

RSI and MACD indicates that the stock is in the overvalued zone.

Conclusion

Microsoft can do well in the next 12 months, but having just seen a good spike in its stock price, I think we can wait until the price drops a little. And particularly this holiday season can bring in some good sales for Microsoft.

Disclosure: none