Companies involved in the personal computing market have all taken some big hits in recent times, and Microsoft (MSFT), developer of the Windows line of operating systems, is no exception.
The dismal PC sales numbers coming out of Hewlett-Packard (HPQ) and Dell (DELL) were a painful blow, and Intel (INTC) and Western Digital's (WDC) revenue warnings further hurt their collective stock prices. Hewlett-Packard has especially taken a beating recently, particularly from its dismal consumer PC sales. While Dell continues its attempts to diversify, none of these companies comes close to matching the scope of Microsoft. While Intel is exploring ways to enter the cloud computing market, Microsoft has set the standard.
Microsoft is a fundamentally strong company well-positioned to take advantage of both a rebound in the PC space and growth in the smartphone and tablet markets.
Microsoft is currently trading right around $28 with a P/E ratio of just over 15, whereas its 10-year average P/E is over 18. Microsoft saw a huge increase in earnings upon the release of its new Windows 7 platform. I expect to see similarly good news for its bottom line with the recent introduction of Windows 8.
Windows 8 is Microsoft's next-generation operating system for the PC and tablet market. The operating system is specifically designed to take advantage of traditional PCs as well as mobile devices such as tablets, and works well for both traditional keyboard and mouse interfaces, as well as for touch-enabled devices. This allows Microsoft to unify its PC and tablet ecosystem, which should be highly advantageous when it comes to making sure that its tablet platform has a lot of software right off the bat, which will also give it an advantage in the PC realm and competitive tablet market. Thus, if a broad paradigm shift toward tablets happens, it is going to be very easy for customers to move to a tablet produced by Microsoft, rather than moving to a foreign operating system such as Google's (GOOG) Android or Apple's (AAPL) iOS. Well over four fifths of PC users use Windows as their operating system. In addition to positioning Microsoft in the emerging tablet space, the Windows 8 launch on the traditional notebook and desktop should attract PC buyers who are holding off on upgrading until systems based on the new operating system are available.
While the release of Windows 8 is a huge deal, its success is pretty much guaranteed. Most people use Windows and those who are upgrading will most likely buy Windows 8 systems. What will prove to be much more interesting and more lucrative for its stock price is Microsoft's introduction of the Windows Phone 8. Microsoft is raising the stakes with its latest move into the smartphone market. If the Windows Phone 8 is successful, it will position Microsoft as the king of tech.
The new Windows 8 has received good reviews from technical experts thus far. Windows Phone 8 is a beauty, competing very nicely with the Android and Apple systems. Furthermore, all of the phones based on Windows Phone 8 will be running on Qualcomm's (QCOM) Snapdragon S4, a system-on-chip that is hands down the best chip in mobile devices today. While it will be up to the handset manufacturers to develop compelling designs to win share in the space, Nokia's (NOK) Lumia 920 is certainly promising, and Samsung's (SSNLF) track record of being a dominant force in the smartphone space for the android market both hint that the Windows Phone 8 will be a resounding success for Microsoft.
Microsoft has one of the best balance sheets in the market today. With $62 billion in cash and $12.78 billion in debt, I am hard pressed to find a company in better shape - certainly not a company with this cap size. The great thing about Microsoft's cash position is that it can afford to keep trying new things. If these initial attempts to enter the mobile phone market are unsuccessful, the firm will try harder until it finally gets it right. Microsoft's Xbox is a prime example of this. The Xbox entered the market as a decent, but not great, game console. Microsoft then introduced the Xbox 360, and it quickly became the best console in the industry with world-class development tools, easy-to-work-with hardware, and compelling first and third party games. This financial security will allow Microsoft to take the risks needed to crack the smartphone market with its Windows Phone, and to crack the tablet market with its Windows 8 operating systems.
In addition to having an exciting pipeline of products, Microsoft is quite generous to shareholders with both buybacks and dividends. However, the buybacks have slowed recently, so I would not expect to see much activity on that front going forward. Dividend growth has been nice, with a near doubling in the quarterly dividend over the last five years. I believe this will continue, so investors who want a nice dividend will do well to look at Microsoft. For the long-term investor, it seems that Microsoft is good to its shareholders and will continue its shareholder friendliness.
Microsoft is an excellent company that is in amazing financial shape. Its products are well designed, and it is putting its resources to good use by expanding upon its core PC-centric business and attempting to become a major player in new markets. It is also extremely shareholder-friendly. Microsoft is solid and should be in any portfolio.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.