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Suman Chatterjee
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Financial analyst-writer for the last 3 years. Writes for a number of financial publications including The Street, Motley Fool and Seeking Alpha. Completed his Bachelors in Business Administration (Finance) with GPA 3.0, currently pursuing Chartered Accountancy from ICAI, India. Specializes in... More
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  • Microsoft's Stock Prices Will Probably Go Up

    If there was one company that did not provide any significant shareholder return even in spite of exceptional performance in the last few years, that is Microsoft. As is written in this article:

    [...]the Microsoft example provides is how there was such a separation between business results and stock performance. Clearly, Microsoft, the business, performed exceptionally well from 1999 until today. However, because the price was so insanely overvalued, shareholder returns were poor in spite of strong operating results.

    As a matter of fact, a company's performance and its shareholders' returns are two completely difference thing. That's where the term 'value' comes in. In this article, I want to research a bit about the present value of Microsoft (NASDAQ:MSFT) and where the stock price might be heading from here.

    One of the best valuation indicators can be the price estimates by the analysts. According to Investorguide.com, here is a list of price estimates as per popular analysts. And it does not seem too inspiring to me. In fact, the stock's target price has been revised downward in the last 3 weeks.

    (click to enlarge)

    Is Microsoft really getting overvalued?

    If I consider $25 as the average price for the last 5 years, then Microsoft is currently trading above its mean stock price. Can we justify the uptrend? With Windows 8 not doing so good and the PC market going down, we do not have enough valid reasons to justify the current surge in Microsoft's stock price.

    (click to enlarge)

    It can be noticed though that the non-corporate insider transactions have leaned far too much on the 'selling' side. Non-corporate insiders can be expected to be not interested in taking over a company. They are mainly focused on wealth maximization, as are we. And why are they selling more than they are buying? Are the insiders not so confident about the company? Or are they knowledgeable about the imminent stock price decline?

    One interesting thing to note is that the institutional investors have not changed their positions much in the last three months. Should we be following the 'big money'?

    Institutional Holdings:

    65.00% (as of 02/28/13)

    Bought (Previous 3 Mo):

    422.26 MN

    Sold (Previous 3 Mo):

    425.65 MN

    Total Held:

    5.45 BN

    Institutions:

    3.29 K

    Non-Corp. Insider Holdings:

    9.20% (as of 01/31/13)

    Bought (Previous 3 Mo):

    15.13 K

    Sold (Previous 3 Mo):

    5.05 MN

    Let us take a look at the various valuation ratios now.

    Fundamental Valuation

    Price-to-earnings ratio: The interesting thing to note about Microsoft's PE ratio and stock price is that while the price has been relatively been trading around the average level for the last 5 years, the PER is at its lowest right now since 2010.

    (click to enlarge)

    With EPS expected to reach $3.5 by 2015, the price has potential to grow. High EPS always equates to higher PE ratio and lower PEG ratio. Right now, the PEG ratio seems to have reached the upper limit. With any positive updates from Microsoft, the PEG ratio should go down, with PE ratio going up, raising the valuation of the company.

    (click to enlarge)

    Price-to-book ratio: The P/BV ratio is at its lowest in the last 10 years.

    (click to enlarge)

    If you look at the table below though, shareholders' equity has gone up exponentially since 2010. With $63 billion in short-term investments and $10.7 billion in long-term debt (only $1.23 billion of that counted as current) as of December, 2012, the company seems to be in a healthy financial position.

     

     

     

    2003

    2004

    2005

    2006

    2007

    2008

    2009

    2010

    2011

    2012

    Cash

    49.05B

    60.59B

    37.75B

    34.16B

    23.41B

    23.66B

    31.45B

    36.79B

    52.77B

    63.04B

    Current Assets

    58.97B

    70.57B

    48.74B

    49.01B

    40.17B

    43.24B

    49.28B

    55.68B

    74.92B

    85.08B

    Total Assets

    79.57B

    92.39B

    70.82B

    69.60B

    63.17B

    72.79B

    77.89B

    86.11B

    108.70B

    121.27B

    Current Liabilities

    13.97B

    14.97B

    16.88B

    22.44B

    23.75B

    29.89B

    27.03B

    26.15B

    28.77B

    32.69B

    Total Liabilities

    18.55B

    17.56B

    22.70B

    29.49B

    32.07B

    36.51B

    38.33B

    39.94B

    51.62B

    54.91B

    Stockholder' Equity

    61.02B

    74.83B

    48.12B

    40.10B

    31.10B

    36.29B

    39.56B

    46.18B

    57.08B

    66.36B

    Needless to say, the book value per share should go up in the coming few years. $2.31 billion worth of investment in fixed assets in 2012 is not going to go to waste, I am sure. And that's when P/BV ratio is going to rise to the normal level. In fact, the current book price is $40.52, the price at which the stock should trade to achieve the average P/BV level of the last 10 years. So, the current stock price is undervalued by 41.6%.

    Price-to-cash flow ratio: Looking at the table below, FCF has a CAGR of 7.8%.

     

     

     

    2003

    2004

    2005

    2006

    2007

    2008

    2009

    2010

    2011

    2012

    Free Cash Flow

    14.91B

    13.52B

    15.79B

    12.83B

    15.53B

    18.43B

    15.92B

    22.10B

    24.64B

    29.32B

    Growth %

     

    (9.32)

    16.79

    (18.74)

    21.04

    18.67

    (13.62)

    38.8

    11.5

    19

    With the discount rate being taken as 15%, the current discounted growth price is $38.65. The current stock price is undervalued by 35.03%.

    The FCF has grown steadily in the last 5 years, except for 2012. Perhaps, the transition-to-mobile phase is taking its toll on the company, which I hope to get resolved by the end of 2015.

    (click to enlarge)

    Price-to-sales ratio: When we look at the image below, it is clear that the P/S ratio is also riding at its lowest since 2010. Why? Revenue has been rising steadily since late 2009 to $73 billion by the end of 2012. With the PC market still growing in single digits, I really don't see any reason why P/S ratio should go down that drastically. It is as if the market forecasted future decline in revenue without any valid reason, reflecting that in the P/S ratio.

    (click to enlarge)

    And that is in contrast to analysts' estimates that sales should reach $92 billion by the end of 2015. It must be noted though that revenue is expected to stall following that. According to me, it is still too far-reaching at the moment. One right acquisition and the whole scenario might change.

    Having said that the company might be undervalued in comparison to itself, it is always good to verify the same in comparison with the immediate peers as well. Let us look at the comparative valuation analysis of the company.

    Companies

    Price/Earnings Ratio

    Price/Book Value Ratio

    Price/Sales Ratio

    Microsoft Corp

    15.65

    3.58

    3.22

    Intl. Business Machines

    14.71

    12.29

    2.25

    Oracle Corp

    14.95

    3.59

    4.05

    Hewlett-Packard Co. (NYSE:HPQ)

    NA

    2.06

    0.38

    Apple

    10.16

    3.59

    2.71

    Even though Microsoft might be fundamentally undervalued, it still seems overvalued when compared to Apple (NASDAQ:AAPL). If we consider the growth potential in the mobile market, Apple seem to be better valued than Microsoft. IBM (NYSE:IBM) and Oracle (NYSE:ORCL) seem quite overvalued at the moment (although I would go over them separately in other articles).

    Technical Valuation

    While the uptrend seems to be slow, it is showing the rising flag pattern. Thus, it might turn out to be a strong uptrend. Rising PVT line, with the rising RSI level (currently at 62-ish), seems to verify the upward trend. 'Higher highs and lower lows' in Chaikin MF indicator and MACD divergence curve provide optimism to the graph. The recent crossovers of the MACD line above the exponential average show that there might be an uptrend along the horizon.

    (click to enlarge)

    Conclusion

    Looking at the fundamental and technical metrics mentioned above, it can be safely said that Microsoft stock price has the potential to soar in the future. Not to mention the fat dividends that you will probably enjoy alongside. With its sheer size of around $240 billion, this company has the necessary 'economy moat' a technology company dreams about. One of the tech giants in the world, Microsoft is a good bet for your investing money.

    Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. 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.

    Additional disclosure: Numerical data vary according to sources.

    Apr 01 9:32 AM | Link | Comment!
  • Why Intel Might Be A Better Investment To Apple

    The technology industry is a very dynamic industry per se, and to add to that, as Robert Kiyosaki puts it, the tech sector has currently been the "flavor of the month" for quite some time. Now that leads to a major problem. Average people tend to invest money in an industry that is in the talks. And the dynamism of the industry takes out the stability factor out of it. So you are left with a game of market emotion and a higher chance of failure.

    Looking at it, most of the tech investors are playing the "bigger fool" theory, where they are buying stocks of a company, raising the stock prices. And that inspires other investors to put in their money on the company in hope of the stock prices rising again. The problem with this kind of thinking is that it is based purely on market sentiment. And market sentiment is transitory. That is what is proposed by the "random walk theory" in the first place.

    As a clear case of confusion between this fundamental and techical investing, let us look at an example of these two tech giants viz. Intel Corp (NASDAQ:INTC) and Apple Inc. (NASDAQ:AAPL). What has primarily gained my attention is the graph below.

    (click to enlarge)

    Essentially, Apple's stock prices have returned 262.01% in the last five years, compared to a shameful 3.85% of Intel. Needless to say, while I am not saying that Apple is of no value, it is also an example of how people can sometimes keep on investing based on market emotions. On the other hand, Intel might make a strong case of fundamental investing for the clever investors here. In other words, while you might be more inclined to invest in Apple (as you are governed by market emotions), there is a strong chance that you are missing a value stock, that is, Intel.

    Reasons of Choosing Intel over Apple

    More focus on the Android powered smartphones - In January 2013, Intel entered into Africa when Kenyan wireless operator and Intel partner Safaricom revealed the continent's first Intel smartphone, the Android-powered Yolo. It already has plans to enter into other countries such as China, India, Latin America and Southeast Asia.

    At the CES 2013, Intel already announced some improvements in its foray in the mobile chip processor market. Here is an excerpt from this article:

    "Today, after a year of preparation, Intel announced the Bay Trail-T microprocessor and the Bay Trail-T tablets that manufacturers are developing for both Windows 8 and Android. The Bay Trail-T is a shrink to 22 nm and enhancement of the Atom Medfield chip currently in production that will deliver as much as twice the performance with extended battery life. The Bay Trail-T is a compatible Wintel microprocessor which will run Windows 8 and any Windows app as well and Android and Android apps. This is an advantage over the ARM powered Microsoft Surface that runs a Microsoft variant called Windows RT that only runs Windows applications that have been re-coded and recompiled.

    In February at the Mobile World Congress in Barcelona, Intel is expected to update its investors and partners on its Merrifield processor due to be launched later in 2013. Merrifield, first announced in May 2012 at Intel's investor conference, is targeted at smartphones, a shrink to 22 nm with performance improvements similar to the Bay Trail-T. Intel has begun production of its LTE/4G baseband chip, according to Intel's spokesman Jon Carville."

    Is Intel's focus on Android powered phones viable enough? Of course, it is. Google's (NASDAQ:GOOG) Android surged to a whopping 68% share of the global smartphone market last quarter. That's four times the 17% market share held by Apple, according to a recent report from research firm IDC.

    (click to enlarge)

    If the new Intel-branded chip does well in the 2013 market, we will probably see further growth in the bottom line of the company. That will show as an increase in the market price of the company. On the other hand, unless Apple gain sufficient market share with its latest iPhones and iPads in a year or two, its stock prices can be hit hard and will probably tank.

    When you are investing in Intel, you are not only investing in the strong technical prowess of Intel in the semiconductor industry, but also in Android's future potential in the global market, which seems far prettier when compared with Apple.

    Economic moat around the company - Again, we are talking about a company that has a market worth of over $100 billion and over 57% share in the microprocessor chips market. Although Qualcomm (NASDAQ:QCOM) occupies around 24% share in the mobile semiconductor market, as last reported in 2011, one thing can set Qualcomm back. It does not have a strong brand as Intel. Consumers buy electronic devices on the very premise that they use Intel's chips. People trust and rely on the quality of Intel's products. Intel's revenue is governed mostly by its technologically sound and market ready products it manufactures. Do you think Intel might not be able to gain that in the mobile market as well?

    On the other hand, I have a strong conviction that Apple competes more on brand preference and design. It is basically the "coolness" factor that drives Apple's revenues. Nonetheless, it will be harder (and more expensive) than most people think for Apple to remain as dominant as it is today. It will be harder for it to maintain its profit margins because it's not competing on the basis of pure technology.

    Moreover, the biggest entry barrier to the semiconductor industry is the amount of capital expenditure required for a full-fledged business. Intel's research and development (R&D) expenditures were $8.4 billion in 2011 ($6.6 billion in 2010 and $5.7 billion in 2009). And with some new products in the pipeline, it might increase in 2013. Here is the capex ratio of Intel.

    It stands well over a whopping 75%! In comparison to that, here is the capex ratio of Apple.

    From the graph above, either Apple is not investing enough in its capital assets or that the business it is in does not require that high capital expenditure as required by Intel. In either case, lower capex requirement means lower economic moat for the company.

    Return on shareholders' equity - In 2012, Intel earned more than $20 billion in cash. With this huge profit, Intel spent more than $16 billion returning capital to its owners via cash dividends ($4 billion) and share buybacks ($12 billion). In other words, shareholders at Intel kept 80% of the profits. Doing the math, while Intel is worth $100 billion in the market, the current shareholder yield (including cash and share buyback) stands now at over 16%.

    On the other hand, Apple earned $50 billion in cash last year. How much was returned to the shareholders? Almost nothing, considering the huge cash hoard of around $150 billion - the shareholders got only $4.5 billion in total dividends (cash and net share buybacks). The company retained more than 90% of its earnings. With Apple's market worth being around $420 billion, the current shareholder yield (including cash and share buyback) stands now at around 10.7%.

    In addition to that, let us take a look at the technical price chart of Intel.

    (click to enlarge)

    In the recent times, there have been more 'green candlesticks' and lesser 'red candlesticks', which says people are getting more and more optimistic about Intel. And if you look closely, it is developing into a triangle pattern, which signifies undecidedness of the market. If you look closely at the A/D line and PVT line, you will see a weakening momentum of the current downtrend. MACD divergence shows lower lows, which indicates that there might be a trend reversal soon. RSI signal of around 40 also confirms the present oversold market condition.

    In short, each of the technical indicators says primarily one thing: Intel's share price might rise sometime soon.

    Conclusion

    While Intel might not be the market's favorite at the moment, it might be a folly to overlook the potential of the stock at this moment. Remember Warren Buffett's famous rule of thumb: Buy when others are selling; sell when others are buying.

    With severely oversold market condition, strong fundamentals and future revenue growth forecasts, Intel just might turn out to be a good growth stock along with being a value stock that it is. Not to mention the fact considering the points mentioned above that Intel does seem to be a better investment compared to Apple at the moment.

    Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. 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.

    Feb 21 1:41 PM | Link | Comment!
  • Should You Follow Eric Schmidt And Sell Google Shares?

    In a recent SEC report, it was officially announced that Google's (NASDAQ:GOOG) ex-CEO, Eric Schmidt would be selling over a third (nearly 42%) of his total equity share in Google.

    "On November 15, 2012, Eric E. Schmidt, Google's Executive Chairman of the Board of Directors, adopted a stock trading plan in accordance with the guidelines specified in Rule 10b5-1 under the Securities Exchange Act of 1934, as amended, and Google's Policy Against Insider Trading. In February 2013, sales of Eric's Google stock may commence under this trading plan."

    We are talking about the 10b5-1 trading plan here that allows a company insider to buy or sell company stocks at the time of non-possession of material non-public information (MNPI). The 10b5-1 trading plan basically maintains that insider stock transations should not affect the stock market positively or negatively. That is why the plan commences well after the announcement of the Q4F12 and FY12 last month.

    But what actually bothers me? There is a loophole in the plan. What if a person already is in possession of MNPI while adopting the trading plan? You might already know some "insider secrets" as early as in November last year and just wait a couple of months to sell out so that the innocent outsiders do not get any hint. A little more research opens up something even more disturbing.

    The total number of insider purchases has been far lower than the total number of insider sales. Why is so? Is there anything brewing underneath? Is it a matter of shifting risks on each other's shoulders?

    Even Sergey Brin, one of the internet giant's co-founders, has been actively divesting his shares at a steady rate, as it seems from the image below.

    (click to enlarge)

    When very founders are selling stake in the company, you have to look up and notice. Does this prove anything though? No. To know what might be going on inside, we have to peer through the "open windows" - the company press releases.

    Digging Deeper Into The Financials

    Here are a few highlights from the latest financial statements that might interest you as an investor:

    1. Huge Unwarranted Cash Balance - When a company, even after purchasing another company for $12.5 billion in cash, still has cash balance of $14.8 billion left in the asset account, there might not be a reason to worry. But when you see that coupled with increasing investment in marketable and non-marketable securities (going well over $34.8 billion as of December 31st, 2012), you might wonder whether the company is not being able to find suitable avenues to invest. We all know that Google has been showing signs of maturity (as every tech company does), even though it operates in one of the most dynamic industries out there. If I do not hear any news of the "next big thing" in a quarter or two, Sergey Brin's action and subsequently, Eric Schmidt's plan to do the same will hint at something else.
    2. Huge Intangibles and Goodwill - When your intangibles and goodwill increase by over $9 billion in a year, you get scared because you wonder whether these numbers are bloated or not. Remember how Seagate had to write off over $2.3 billion as impairment charge over acquisition of Maxtor in 2009. And who can forget how the $5.1 billion impairment charge by Macy's in 2008? When I see too high a goodwill increase, the very first thing that comes to my mind is whether the company can justify for it. You pay a premium only when you know you can justify for the over-valuation with increased free cash flow (NYSE:FCF) and increased operating margins in the future.
    3. Retained Earnings - When retained earnings surges to $48.3 billion in 2012 from $37.6 billion in 2011 (up by over $10 billion), one is curious about what the company is doing with the money. With no dividend payout and loads of cash sitting in the coffer of the company, does it not sound like the food being wasted in the fridge rather than being eaten early? We go back to the same proposition - unless Google shows us any "new" signs of business improvement, stowing away money for future use does not really matter. Remember, we need to factor in the time value of money as well.
    4. Motorola Mobility Profitization - Total revenue from Motorola Mobility segment was reportedly $4.14 billion, with total costs/expenses recorded at $3.5 billion in 2012. That is a gross profitability of over 18%, not bad indeed! But gross income from the segment resulted to only $640 million. Doing the math, we would need 19.5 years to gain the return of total investment of $12.5 billion. That's too long a time to even think about. If Google wants to show Motorola Mobility as a viable investment, Google should focus more on improving the 'synergy' of operations. Yes, the unaudited YoY consolidated revenue growth of 32% (including revenue from Motorola Mobility) does satisfy me since the investment was done only halfway through 2012. But what about total YoY Google revenues last year, apart from that from Motorola Mobility? That stands at 21%, compared to the 2010-11 revenue growth and 2009-2010 revenue growth stand at 29% and 24% respectively. Not very inspiring, right? Needless to say, Google is under strong pressure to perform and show the reason behind its investment in Motorola Mobility and how it is integrable with Google's future business strategy.
    5. Purchase of PPE - When you are spending over $3 billion every year on plant, property and equipment, it should show in strategic growth in revenue and thus, net income margin of the company. When net income from continuing operations increased by 22% YoY in 2012, what concerns me is that it is steadily decreasing compared to 26% in 2011 and 29% in 2010. Is Google slowing down? If so, the only thing that will happen is that the PE multiple of 24 will fall down to industry average of 20. And that means subsequent fall in Google's share price.

    The table below is self-explanatory that Google's inefficient asset utilization (given by lower ROAA and higher current ratio) might be dragging the income margin down, which will ultimately readjust the PE ratio down to the industry average of 20.

    Companies

    Price-to-Earnings Ratio

    Price-to-Sales Ratio

    Current Ratio

    Return on Average Assets

    Gross Margin

    Google

    23.98

    4.48

    4.22

    12.71

    56.91

    Baidu.com (BIDU)

    20.09

    8.31

    4.21

    28.49

    77.95

    Yahoo! (YHOO)

    6.32

    4.49

    4.38

    2.67

    69.38

    Microsoft (MSFT)

    15.18

    2.68

    2.81

    20.42

    73.47

    AOL (AOL)

    3.24

    1.17

    1.74

    4.77

    27.48

    Facebook (FB)

    1905.74

    10.70

    10.71

    1.65

    74.89

    Possible Areas of Business Expansion

    Google Fiber: This is one business possibility with HUGE potential. If you look at the image below, Google TV has been trending up over time. And with the introduction of the new upcoming Google Fiber, people will take more inclination to Google TV, turning it into yet another revenue source for Google.

    (click to enlarge)

    Google Apps: Google Apps are yet another income source for Google. As per this Wired.com article, Google might monetize its apps platform, which has been gaining popularity by the day.

    'The search engine giant cites demand for more features from its business customers as the main reason to dump the free version, which is used by individuals and small businesses with 10 or fewer users. "Businesses quickly outgrow the basic version and want things like 24/7 customer support and larger inboxes," writes Clay Bavor, Director of Product Management, Google Apps on the company's blog.

    Google says that "millions of businesses" are using the service, which has prompted it to cash in on all those users. Getting rid of free accounts could also mean that Google is working on more services and functionality for its cloud-based office suite, which competes with Microsoft's desktop-based software Office.'

    Google Social Media - With recent purchase of Wildfire and the ever-increasing focus on Google+, it is noticeable that Google wants to create something that competes with Facebook. Not to mention the fact that Facebook itself has challenged Google a couple of times including the latest Graph Search. With more and more people joining Google+ (the 2nd largest social network in the world), it is only a matter of time that people actually start giving more attention to it.

    (click to enlarge)

    Google is giving mixed signals from an investor's point of view. With not-so-impressive ratios, weak fundamentals (By "fundamentals", I mean "business strategization, asset allocation and execution" mainly) and insider selling of shares, Google stock price is at the edge of a cliff. The only thing that can help Google maintain the present market valuation is quality earnings' growth in the coming few quarters. If investors see enough growth, they will keep the Google shares or else, move on to better growth or dividend pastures.

    And that, my friend, might result into a downslide of the stock price.

    If we are go by the chart below, Google seems to be overbought at the moment, with a RSI signal of 70 (A/D line and PVT line trending up as well). It is highly likely that Google might fall down from here, and I would give a support at $550 if Google does fall.

    (click to enlarge)

    Having said that, no one can predict the future of a tech giant and that also, Google. But it might be a good time to divest part of your Google shares to invest in something more worthwhile, as a part of your diversification plan.

    Remember how Apple's price crumbled down over the last few weeks. It's better to be safe than sorry.

    Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. 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.

    Feb 12 9:44 AM | Link | Comment!
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