Microsoft Is Still An Attractive Option For Long-Term And Dividend Investors

Oct. 8.12 | About: Microsoft Corporation (MSFT)

Microsoft (NASDAQ:MSFT) has always had an excellent track record at providing returns to shareholders and leading the technology market in innovation. It is a dominant player in the software market competing with giants such as Oracle (NYSE:ORCL) and IBM.

Why buy Microsoft?

  • Many investors have started to question whether Microsoft is still the company it once was. The release of Windows 8 and the complete revamp of the Windows OS should convince investors that Microsoft is still an innovative company which can reward its shareholders.
  • Many smartphones have embraced the new Windows OS, most notably the Lumia phone, which has been hugely popular across the world. The Lumia 900 when it was released was in the top ten in the Amazon (NASDAQ:AMZN) Best Sellers list for many weeks. The black version of the phone was particularly popular as it was in the top ten till the end of June and was one of the highest-rated handsets. Microsoft's collaboration with Nokia (NYSE:NOK) is likely to reap rewards for both companies, providing Microsoft with its next big revenue stream. It will provide the basis for the launch of a new generation of Windows phones. Microsoft might well become one of Apple's (NASDAQ:AAPL) main competitors in the smartphone market. This is especially the case after many of the platforms which use Google's (NASDAQ:GOOG) Android system have run into problems in the courts losing many lawsuits to Apple.
  • Microsoft's Azure platform is quickly emerging as one of the leading platforms in cloud computing. Microsoft's early entrance into this lucrative market will help its profit margins over the long run and allow it to market its products universally under the same system. Although cloud computing might harm Microsoft's profit margins over the short run (through commodifying its products), it will also open up a new revenue stream with the advent of cloud-based software services.
  • Microsoft also offers a fairly attractive dividend with a 3.08% projected annual yield. It pays this dividend quarterly and the last dividend paid out was 23 cents per share. It has consistently paid this dividend over the last ten years and has often increase the dividend level.

However,

  • Microsoft will have to adjust its business model over the next year to keep up with cloud computing. Moving its Office applications to a subscription model is just one area where it can slip up. Nonetheless, Microsoft has a great deal of experience in adjusting in business model to keep up with the times and as it is one of the pioneers of cloud computing it will likely make the transition more quickly and smoother than its competitors giving it a competitive advantage.
  • Microsoft stands to lose a significant part of its revenue from its OS. Piracy is growing in emerging market and as this is the area where PCs might grow in the future the outlook looks fairly dim for Microsoft in these markets. Cloud-based services have also started to separate applications from operating systems making operating systems much less important. Both of these factors mean the Windows OS will become increasingly irrelevant to Microsoft as it continues to see reduced revenues and reduced profits from this area. Nonetheless, it is worth noting, that the move to cloud-based services is a good move for Microsoft because their Azure platform will undoubtedly turn into a large cash cow.

I could not recommend this stock more highly as a long-term option. However, for those investors who enjoy having short-term gains and then cashing out, this stock is not for you. Microsoft will enjoy gains from its resurgence but these gains will take time to show.

Disclosure: I am long MSFT, NOK. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.