Microsoft's Time Has Come ... Again

Jun.20.12 | About: Microsoft Corporation (MSFT)

When we recall the history of Microsoft (NASDAQ:MSFT), we need to remember that it was an upstart that made the MS-DOS operating system used exclusively by IBM (NYSE:IBM) compatible personal computers (take a look back). I can recall saying that if you did not own an IBM you did not really have a computer. Actually not many people in the general population even knew that the MS-DOS operating system was made by Microsoft.

From "The History of Microsoft Operating Systems" by

Originally developed by Microsoft for IBM, MS-DOS was the standard operating system for IBM-compatible personal computers. The initial versions of DOS were very simple and resembled another operating system called CP/M. Subsequent versions have become increasingly sophisticated as they incorporated features of minicomputer operating systems.

With the mainframe business and the personal computer business, IBM was the technology company of a generation that evolved from punch cards to the "Big Blue" darling of Wall Street.

In 1985, Microsoft put a dent in that armor with the release of Windows 1.0 and little did anyone know at that time, but "Mr. Softee" was about to take away the most important part of IBM's business, personal computer software:

Introduced in 1985, Microsoft Windows 1.0 was named due to the computing boxes, or "windows" that represented a fundamental aspect of the operating system. Instead of typing MS-DOS commands, windows 1.0 allowed users to point and click to access the windows.

It was not too long before we were saying, "without Windows, we do not have a real computer."

The "new" IBM was then Microsoft, and when we take a look at history we can put some perspective on this weeks release of the new Surface tablet, which just so happens to include Windows Office in its package.

I have read the initial reviews of the Surface, and they are all pretty good, but in the background I hear; "yeah, but it ain't no Apple (NASDAQ:AAPL) iPad." C'mon folks, you have heard it also! Could this be "deja vu all over again," as Yogi Berra would say?

I particularly like this review by Barbara Krasnoff in Computerworld:

I've been in this business way too long to get enthusiastic about a product that hasn't yet been examined by journalists and other non-Microsoft testers. Especially when there is still so much information that we don't yet have. And I'm definitely not wed to the Microsoft OS -- while my personal laptop uses Windows 7, my work laptop is a MacBook Pro, and I carry a Samsung Galaxy Nexus loaded with Android 4.0.

But, as Matt Hamblen says in his hands-on article about the Surface, the keyboard covers that Microsoft introduced are the "secret sauce" that could make these tablets something to be considered -- both as entertainment devices and as lightweight systems on which somebody who writes can get some real work done.

Here is Matt Hamblen's review in his hands on article also on Computerworld;

... the weight, at less than 2 lbs., felt great. Engineers showed off the materials in the tablets and emphasized the durability of the case, along with the Corning's Gorilla Glass screen. I guess this is the direction Microsoft wanted to take with Surface tablets: durable, with an emphasis on seriousness.

Is it possible that with this launch by Microsoft, that it will now put a dent in Apple's armor? MSFT did it before, can it do it again? Well, let's just say that if there is a company out there that has the potential to give Apple a run for it's money, it would be Microsoft.

Back in the 1980s, IBM was content to let Microsoft play around with Windows while IBM kept rolling out mainframes. Whoops, big mistake. Now, I am not suggesting that Apple will sit around and watch Microsoft take over the tablet business, but let's be honest, Microsoft has chunks of money to do plenty with, and if it's as diligent in its pursuit of the tablet business as it was back in the 1980s in the operating systems business, well, Mr. Softee's time just might be at hand again.

To be sure, Microsoft faces an uphill battle (just as it did with Big Blue, right?) and it has a long way to go. I do not think that the technology world should count Microsoft out though, and if Apple is not on it's toes, Microsoft can do some major damage.

Either way, I believe that this product launch, and subsequent ones, can lead to another round of huge growth for Microsoft and that would make the share price right now a terrific value.

Microsoft: Price: $30.70/share, ESS rating: Bullish

  • A very low 9.5 forward PE ratio
  • An extremely high operating margin of 39%
  • $58 billion in cash with only $13 billion in debt
  • With an estimated 35 million tablets being sold in 2011, if Microsoft can grab just 25% of future sales, they can generate nearly 8 million in tablet sales
  • 8 million table sales at roughly $800 each would generate almost $7 billion in revenues and almost $250 million in bottom line profits just in the first full year alone!

Toss in the dividend yield of 2.75% and we have a stock that might just belong in everyone's core portfolio now. It is in mine.

Disclosure: I am long MSFT. I also own Apple LEAP call options