Microsoft (MSFT) is one of the few survivors of the technology bubble. As a company, it experienced double-digit growth rates. However, since the burst of the technology bubble, the stock has gone nowhere. Even after the recent bull-run, the stock is trading way below its heyday valuation. The giant corporation is facing tough competition from competitors, including Apple (AAPL), Oracle (ORCL), Google (GOOG), and several others. While the rivals' position in the market is strong, Microsoft also has a great moat in the field. The company is still at the center of innovation, and it recently entered into Apple's territory by introducing its own tablet. I do not expect this move to be a significant threat to Apple, but it could provide additional revenues to already cash-rich Microsoft.
Thanks to the lack of competition in the Windows operating system and Office software, Microsoft achieved a successful recurring revenue source. The number of Microsoft users recently exceeded half billion. This is a worldwide penetration of over 500 million users. Apple, on the other hand, has slightly over 25 million users. The only serious threat is Linux, which could not make it to the mass markets. As such, Microsoft will continue to sell PCs with the core Windows software. This is a very steady source of revenues. It might be claimed that tablets will overtake desktop PCs. I think personal computers will always be around. Microsoft also has a wide moat in the rest of the world. The rise of emerging markets in Asia, Africa, and Latin America will provide increasing profits for the long-term.
Microsoft has great business prospects. I need to admit that Windows Vista was a disaster. However, the new Windows 7 have been remarkably well received. This software has given Microsoft the ability to compete in the smart phone and tablet market dominated by Google's Android. Then there is the Kinect factor, the motion sensing device for Microsoft Windows and the Xbox 360. This device has already sold over 10 million since it went commercial in late 2010. The closest rivals Nintendo and Sony could sell only less than half of that in this period.
I think Microsoft's research in cloud computing will be a successful investment. Once Microsoft's servers get accepted by the community, the cloud computing services could prove to be highly lucrative. Consumers will depend on Microsoft for low cost computing solutions. Microsoft's partnership with Netflix (NFLX) to stream movies to the Xbox is also a significant investment. While Netflix is having its own issues, this move was intended to boost sales of the new Xbox 360.
Microsoft will soon launch its much awaited Windows 8 sometime in late 2012 or early 2013. Already the pre-release version is out. After watching the demo, I realized that the new Windows 8 will include almost everything competitors can offer. It seems like there is a substantial emphasis on social networking and communication services. We might even observe Facebook (FB) like applications, as Microsoft is already engaged in a strong collaboration with Facebook.
Financials and Valuation
Microsoft stock is currently trading at about $30 per share. The stock has been trading within $20 - $30 range since 2003. On the other hand, Apple and Google are racing to make it to $1000. The low stock price makes Microsoft an affordable stock among investors. While the stock made a good run in the recent months, I expect the price to keep rising, given the stable revenues and continued innovation. The graph below shows Microsoft's price movement in recent years.
Microsoft also posted great financial results over the past ten years, even though the share price tells a different story. This can be shown in the graph below, which shows the trend in annual revenues and income. The revenue growth has been around 10% per annum, and the net income growth has also been around that figure. Microsoft has been a top dividend payer, awarding its shareholders with regular payments for the past 10 years. Investing in Microsoft guarantees a safe and stable dividend income.
Although Apple's market capitalization of $550 billion is worth more than Microsoft ($255 billion) and Google ($190 billion) combined, Microsoft has a particularly attractive balance sheet. In fact, each stock comes with $5 worth of net cash investments per share. Investors should expect not only capital appreciation, but also a modest growth in dividends. Looking at the past performance of dividend growth, Microsoft can double the dividends within the next 5 years.
Investment in Microsoft can be rewarding decision, especially for those who are patient enough. The share price is low, and the business prospects are strong. Microsoft consistently paid dividends for the past ten years and is expected to continue doing so. The trend in income is upward, as well as revenues. The company is innovating new software products and services. The innovations have been recently extended to consumer electronics. At a trailing P/E ratio of 11, and forward P/E of 10, it is trading at a deep discount to competitors. Earnings are expected to grow at double digit rates, which is very reasonable. That is why I think Microsoft is on sale for a limited time.