Seeking Alpha

Suman Chatterjee's  Instablog

Suman Chatterjee
Send Message
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
My blog:
  • Microsoft's Stock Prices Will Probably Go Up 0 comments
    Apr 1, 2013 9:32 AM | about stocks: AAPL, HPQ, IBM, ORCL, MSFT

    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.

    Themes: long-ideas Stocks: AAPL, HPQ, IBM, ORCL, MSFT
Back To Suman Chatterjee's Instablog HomePage »

Instablogs are blogs which are instantly set up and networked within the Seeking Alpha community. Instablog posts are not selected, edited or screened by Seeking Alpha editors, in contrast to contributors' articles.

Comments (0)
Track new comments
Be the first to comment
Full index of posts »
Latest Followers

StockTalks

More »

Latest Comments


Instablogs are Seeking Alpha's free blogging platform customized for finance, with instant set up and exposure to millions of readers interested in the financial markets. Publish your own instablog in minutes.