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- Microsoft has enough cash to borrow tens of billions and buyback a large percentage of its float.
- The dividend yield is higher than MSFT's after-tax cost of debt, meaning the financing takes care of itself.
- I think MSFT is worth about $51 right now and more if it announces a debt financed buyback.
Microsoft's Smartphone Business Will Continue To Grow
- Recently, I covered Microsoft's acquisition of Nokia's handset business, citing that although it may seem like a bad move on the surface, it may bear fruit in the long term.
- Quarterly data shows little improvement with respect to phone hardware revenues and gross margins.
- On the bright side, units sold increased quarter-over-quarter, reflecting increasing demand.
- Microsoft is set to launch the low-cost Nokia 435, which seems to be a good play in developing countries.
The Future Of Microsoft: Windows 10 Goes Both Ways
- Windows 10 sets the stage for Microsoft to become a platform for not only preexisting devices, but embedded computing.
- Monetization of Windows 10 is shrouded in uncertainty, but expect Microsoft to reveal more details in early 2015.
- The unified software ecosystem is disruptive and puts Microsoft in a better position to integrate Windows into the Internet of Things, which is set to take off over the next decade.
- Analysts believe more share buybacks can help drive Microsoft's stock price higher in the next year or so.
- With Microsoft's strong cash flow and credit rating, it could issue $33 billion in debt to help buy back shares.
- With $4.9 billion remaining on the company's buyback program, overall repurchases can lead to a minimum 16% upside by 2016.
- Windows 10 will drive PC refresh going into 2015.
- Skype's language features will give Microsoft a larger share of all international calling.
- Power BI gives Microsoft the ability up-sell preexisting Office 365 users into big data analytics (a rapidly growing market).
- FY 2015 will be a major year for Microsoft, as various product developments will drive meaningful earnings growth.
Microsoft's Black Friday Win With Xbox One A Piece Of Welcome News
- Microsoft's Xbox One video games had been trailing Sony's Playstation 4 for months.
- Xbox One's download-centric delivery system could boost the Devices and Consumer, Other segment in future earnings.
- Game hardware is traditionally a loss leader, and the big payoff could be a couple years down the road.
- Having initially forecasted a five-year price target of $53 for Microsoft, the current price of $49 signifies investors are anticipating greater growth than previously anticipated.
- While Microsoft's P/E ratio has increased significantly to 19.4x, dividend growth has remained as expected and quarterly earnings per share most recently missed estimates at $2.63.
- Investors should expect significant EPS growth in 2015 to support the current price.
Now At $50, Where Will Microsoft Shares Go From Here?
- Microsoft shares reached the $50 level this week for the first time in nearly 15 years.
- The stock now trades at more than 16 times its fiscal 2016 earnings projections, despite an estimated earnings growth rate of only 6.5%.
- Microsoft continues to generate staggering levels of free cash flow and has an impressive cash position, allowing the firm to continue raising its dividend.
- However, Microsoft shares now appear overvalued by 15%, given the firm's modest growth potential and a forward earnings multiple that is now in line with the broader market.
How Much Will Shareholders Benefit From Microsoft's Culture Change?
- Satya Nadella has successfully transitioned Microsoft to cloud.
- Open source support and cloud rental should compensate for proprietary software losses.
- This is now the best buy for the conservative technology investor.
Microsoft: Doing The Right Thing By Copying Apple
- Just as the Surface tablet was an answer to iPad, Microsoft Band is a response to the Apple Watch.
- Pathetic as it might seem, copying Apple is a strategy that can work for Microsoft.
- Space exists for MSFT in a well-balanced dividend portfolio.
Microsoft's Wearable Looks Like A Happy Meal Toy, However...
- Microsoft's first wearable comes off as a bulky, unpleasant looking "Band.".
- If you ignore looks, you will find a fairly compelling, feature-packed device.
- It's not great, but it's a start to a legitimate "Health" strategy for Microsoft.
- Microsoft's strategy in mobile has shifted away from OS licensing entirely.
- Thankfully, Microsoft has the resources, branding and ecosystem to support a hardware-driven business model.
- Because Microsoft can dictate the direction of its mobile business without carrying much of an intermediary role with OEMs, the mobile business exhibits much more upside potential.
- The wearables and mobile apps market are expected to combine for over $87 billion by 2017.
- Microsoft has made a strong entry with Microsoft Health and Microsoft Band.
- The philosophical shift is, however, the critical element, and positions the company well here.
Microsoft: A High Dividend Growth Stock For The Next Decade
- Even with Microsoft nearing a fair value, I will be holding my position. The primary reason is Microsoft’s dividend growth potential.
- Microsoft can increase its dividend by 10% annually over the next decade, even with no growth.
- There’s a high probability Microsoft will be able to grow its dividend in excess of 15% over the next decade.
Yesterday, 1:39 PM
- VirnetX (NYSEMKT:VHC) and Microsoft (NASDAQ:MSFT) have ended their legal battle.
- Microsoft has "agreed to pay $23 million to VirnetX to settle the patent dispute and expand Microsoft's license," and both parties have agreed to end current litigation and patent review proceeding between them. All other deal terms are undisclosed.
- Back in 2010, Microsoft agreed to pay VirnetX $200M in a VPN patent settlement. VirnetX's shares remain halted for now.
- Update (1:45PM ET): Shares have resumed trading, and are up 20.7%.
Thu, Dec. 18, 2:04 PM
- With the help of stronger-than-expected hardware sales, Oracle (ORCL +9.2%) beat FQ2 estimates in spite of a 400 bps forex headwind (twice what was originally expected). FQ3 guidance was conservative after taking forex pressures into account.
- The numbers have been good enough for Oracle to surge to new highs and receive a slew of target hikes, and to lead many enterprise tech names to outperform amid a big market rally. The Nasdaq is up 1.9%.
- Microsoft (MSFT +3.2%), Cisco (CSCO +2.3%), EMC (EMC +3.7%), VMware (VMW +5.1%), and beaten-down IBM (IBM +2.8%) are among the enterprise tech names outperforming today. Others: SPLK +4.6%. CA +3.5%. RHT +3.4%. VRNS +6.3%. PCTY +5.8%. JIVE +4.6%. VMEM +5.2%. SAAS +4.7%. BRCD +3.8%.
- Oracle's healthy cloud software numbers are drawing attention: While traditional software license revenue fell 4% Y/Y, its SaaS/PaaS revenue rose 41%. SaaS/PaaS bookings totaled $170M, and are expected to be "well over" $1B in FY16 (ends May '16). Fusion cloud app bookings rose over 100%.
- On the CC (transcript), Oracle performed its customary trash-talking of cloud app rivals. "We are clearly growing faster than Salesforce (CRM +4%) and were more than three times the size of Workday (WDAY +3.2%)." Both firms are posting solid gains.
- Oracle's numbers come as Bloomberg reports the Chinese government is looking to "purge most foreign technology from banks, the military, state-owned enterprises and key government agencies by 2020." IBM, Cisco, and other U.S. firms have already seen their Chinese sales fall sharply following last year's NSA spying uproar.
Tue, Dec. 16, 8:38 AM
- Microsoft's (NASDAQ:MSFT) outperformance of late is concerning, says analyst Kash Rangan downgrading to Underperform with $47 price target; especially in an environment of a slowing Win Pro cycle, an "elongated" Consumer Office 365 transition, the challenge of margin leverage, and sell-side exuberance over one-time financial moves.
- Under a "best case" scenario of a $30B buyback and $4B in operating expense cuts, Microsoft could run out of room for earnings growth, leading to a re-rating of the P/E ratio.
- Shares -1.3% premarket
Sat, Dec. 13, 4:10 PM
- Facebook (NASDAQ:FB) is no longer including Bing (NASDAQ:MSFT) results within Facebook Search. The social networking giant says it made the move because it's "focused on helping people find what’s been shared with them on Facebook," and insists it continues to "have a great partnership with Microsoft in lots of different areas."
- It was less than a week ago that Facebook expanded the scope of its internal search platform, adding the ability to search within posts that have appeared within a user's news feed. Moreover, in a move that could make Facebook a bigger indirect rival to traditional search engines, the company plans to eventually extend keyword search to all publicly-shared content.
- As it is, Facebook didn't offer the most direct approach to accessing Bing results - users typically had to click/tap on a "See more results" option, then choose from a list of suggested queries in a right-hand column box. "We don't think a lot of people will come to Facebook to do web searches," Mark Zuckerberg once admitted. However, with Facebook handling over 1B queries of all kinds each day, it still acted as a valuable traffic source.
- Meanwhile, Microsoft has rolled out a slew of new Azure cloud infrastructure and app platform services for the second time this fall (previous). Among the new offerings: 1) A high-performance (SSD-based) storage option for Azure virtual machines. 2) Performance and management improvements for the Azure SQL Database service. 3) An improved search service for 3rd-party apps.
- In addition, previously-announced services such as RemoteApp (cloud Windows app hosting) and Azure Active Directory (cloud identity/access management) are now generally available.
Thu, Dec. 11, 6:24 PM
- Microsoft (NASDAQ:MSFT) has bought HockeyApp, a provider of services that analyze crash data and distribute beta releases of apps for iOS and Android developers. Terms are undisclosed.
- Microsoft, hungry to win over mobile and Web/cloud developers who haven't historically embraced its products, plans to include HockeyApp's features in a new version of it Application Insights analytics service, which integrates with the company's mainstay Visual Studio app development suite.
- Last month, Microsoft announced it would make Visual Studio free for non-enterprise users, and promised Visual Studio 2015 would be "built from the ground up with support for iOS, Android and Windows." Facebook, Twitter, and Google have also released a bevy of tools for mobile developers.
- Separately, Microsoft has made its MSN consumer apps (formerly known as Bing apps) available on the iOS App Store, Google Play, and Amazon's Appstore for Android. News, sports, weather, finance, and health/fitness apps are among the released products; they were already available on Windows (through the Metro UI) and Windows Phone.
Thu, Dec. 11, 6:20 AM
- Microsoft (NASDAQ:MSFT) expects to release Windows 10 "early next fall," says Chief Operating Officer Kevin Turner, outlining a slightly later release than previous comments had suggested.
- An autumn release would put Windows 10 on track to launch three years after Windows 8, which received mixed reviews due to its tablet and touchscreen-oriented design.
Thu, Dec. 4, 1:51 PM
- Whereas Steve Ballmer and Bill Gates preferred to "retain cash for a rainy day," Satya Nadella may be open to bigger capital returns, thinks Nomura's Rick Sherlund, hiking his Microsoft (MSFT +1.9%) target by $6 to $56 and reiterating a Buy.
- Sherlund, who also notes activist ValueAct Capital's presence on the board, sees Microsoft launching "a more moderate, but still shareholder value enhancing, 5%-10% share repurchase" on to top of existing efforts to buy back ~$8B/year worth of shares. He adds Microsoft could lower its share count by 8% if it raised $32B in debt for buybacks.
- Microsoft's balance sheet would made larger buybacks easy to finance: The company had $89.2B in cash and short-term investments at the end of September, and $23.7B in debt. FY14 (ended June '14) free cash flow was $27.7B.
- Aside from capital returns, Sherlund is bullish about Microsoft's ability to cut Xbox and Bing costs, and to keep rapidly growing Office 365 and Azure revenue. His target was only at $40 14 months ago.
- Shares are rallying on a day the Nasdaq is up 0.1%. The 52-week high is $50.04.
- Earlier: Microsoft selling Nook stake to B&N
Thu, Dec. 4, 9:49 AM
- Along with its FQ2 results, Barnes & Noble (BKS -11.4%) has announced it's buying Microsoft's (MSFT +1.6%) stake in Nook Media for $62.4M in cash and 2.7M shares (current value of $52.8M). The companies have also "agreed to terminate their commercial agreement." (8-K)
- With Microsoft having invested $300M in Nook Media (contains B&N's Nook hardware, online bookstore, e-book, and college bookstore ops) in 2012 for a 17.6% stake, the software giant is taking a ~$185M loss on its investment.
- B&N's Nook segment revenue (covers hardware, digital content, and accessories) fell 41.3% Y/Y in FQ2 to just $62M, thanks to tough competition from Amazon and ongoing tablet cannibalization of e-readers. B&N's college segment saw revenue rise 1.9% to $751M.
- The sale follows Microsoft's July decision to lay off roughly half the workers in its Nokia phone unit, as part of a broader restructuring.
Thu, Dec. 4, 12:11 AM
Wed, Dec. 3, 6:45 PM
- The WSJ reports Google (NASDAQ:GOOG) plans to offer higher commissions to top-performing Google Apps resellers, hoping to put a larger dent into Microsoft's (NASDAQ:MSFT) productivity software dominance. Right now, Google has only 10K+ Apps reseller partners; Microsoft has 400K+ for Office.
- Gartner estimates Google accounted for less than 1% of the productivity market's revenue in 2013, compared with Microsoft's 90%+. Corporate familiarity/comfort with Office, together with strong uptake for Office 365 (features both cloud and local apps, unlike Google Apps), have stood in Google's way.
- Google has run about 6,000 studies for ad clients in recent months to see if brand ads leave their intended impression on viewers, says display/video ad VP Neil Mohan. The studies are part of an aggressive push by Google to compel marketers to move more of their brand ad spend online.
- Related efforts include working with Nielsen and comScore to get a better read on who's seeing a particular ad, and ensuring ad impressions are actually viewed by a person (still a challenge). YouTube is set to be a major beneficiary of the shift in brand ad spend towards digital channels.
- The U.K. plans to impose a 25% tax on profits locals produced by multinationals that are shifted to tax shelters. The press is already calling the levy a "Google tax" - it comes amid broader EU scrutiny of the use of tax shelters by multinationals.
- Google has confirmed it's launching versions of popular products, including search, YouTube, and Chrome, meant specifically for kids 12 and younger (previous). Though parental controls will be included, concerns about running afoul of FTC privacy and children's advertising rules exist. "We expect this to be controversial, but the simple truth is kids already have the technology in schools and at home," says Google exec Pavni Diwanji.
Mon, Dec. 1, 11:18 AM
- Acompli provides popular Android/iOS e-mail apps that support a variety of e-mail (Microsoft Exchange, Gmail, Outlook.com) and cloud productivity (Office 365, iCloud, Google Apps) platforms. Re/code reports hearing Microsoft (MSFT +1.1%) is paying $200M+ to buy the startup.
- "Acompli is the powerhouse email app for iPhone that Outlook users have been waiting for," The Verge declared in an April review. The app's integrated calendar and ability to provide quick access to recently-viewed files/attachments and important contacts received high marks. "Taken together, Acompli’s design encourages you to start thinking of your iPhone as a workstation in its own right."
- Microsoft: "In a world where more than half of email messages are first read on a mobile device, it’s essential to give people fantastic email experiences wherever they go ... We’re excited about what’s possible as we build on [Acompli's] success and bring it together with work currently in progress by the Outlook team."
- A recent unfinished blog post from a Microsoft VP suggested a deal would soon be announced. The purchase adds to a multi-platform push that has seen the release of free iPad Office apps and an Office/Dropbox integration deal.
Tue, Nov. 25, 6:32 PM
- State-owned Xinhua reports Microsoft's (NASDAQ:MSFT) Chinese subsidiary has agreed to pay RMB840M ($137M) in back taxes and interest, as well as over RMB100M/year in taxes going forward.
- Though Xinhua doesn't specifically name Microsoft, the software giant is the only company fitting the paper's description - a U.S. multinational whose name starts with "M," is one of the world's 500 biggest companies, and which established a Beijing subsidiary in 1995.
- Microsoft is still dealing with a Chinese antitrust probe amid intense post-NSA scrutiny of U.S. tech giants in general. The company has long complained about the huge impact of piracy on its Chinese sales.
Tue, Nov. 25, 2:46 PM
- "Not surprisingly, billionaires reduced their energy allocations (NYSEARCA:XLE) during Q3," says Direxion, unveiling the quarterly rebalance for the iBillionaire Index (which serves as the benchmark for the IBLN ETF). Attention was instead shifted to healthcare (NYSEARCA:XLV) and materials (NYSEARCA:XLB), with companies like Humana (NYSE:HUM) and Monsanto (NYSE:MON).
- Also added to the index: TMO, GM, FB, CBS, GOOG, MAS, APD, DAL, NOV, WHR, THC, ABBV.
- Dropped from the index: AIG, MCK, CTSH, MSI, RIG, CI, APC, GPS, MSFT, CMCSA, NFLX, MHFI, WMB, ICE.
- Outlying sectors: Consumer Discretionary (NYSEARCA:XLY) makes up 23.33% of the iBillionaire Index vs. 11.68% for the S&P 500, and Industrials (NYSEARCA:XLI) and financials (NYSEARCA:XLF) make up just 6.67% each of the index vs. 10.44 and 16.30 of the S&P 500, respectively. Consumer Staples (NYSEARCA:XLP) have zero representation in the index vs. 9.7% in the S&P 500.
- Previously: Direxion launched an ETF with iBillionaire today
Tue, Nov. 25, 1:13 PM
- The Information reports Yahoo (YHOO - unchanged) and search partner Microsoft (MSFT +0.5%) are aggressively trying to sell Apple on replacing Google (GOOG +0.6%) as the default search engine for the Safari browser (pre-installed on all iOS/Mac OS hardware) when its Google deal expires in 2015.
- Apple, which naturally views Google as a major rival, already dropped Google as iOS and Mac OS' Spotlight search provider this year in favor of Bing. Yahoo, meanwhile, is less than a week removed from announcing it has displaced Google as Firefox's default U.S. search provider; Google is still the default provider in Europe.
- The Firefox deal suggests Google is willing to walk away from default search agreements if Yahoo/Microsoft (hungry to grow their scale) significantly undercut its revenue-sharing terms, betting much of its base will keep using Google regardless. Macquarie has estimated Google provides Apple with a 75% cut on Safari-driven iOS search ad revenue.
- On iOS, users could keep relying on Google search in the event of a Yahoo deal by manually selecting Google as their Safari search option (should Yahoo become the default), or by using Google's popular search and Chrome apps. StatCounter estimates Google had a 92.2% October mobile/tablet search share to Yahoo and Bing's combined 6.5%.
Fri, Nov. 21, 12:46 PM
- Believing Satya Nadella has done little to address core problems, Jefferies' John DiFucci (formerly with JPMorgan) has launched coverage on Microsoft (MSFT -1.5%) with an Underperform rating and $40 target, as part of a broader software stock launch. Shares have turned negative after opening higher.
- "We believe the 'new' Microsoft will look very much like the 'old' Microsoft for some time," says DiFucci in his note. He observes the majority of Microsoft's op. profit is still tied to PCs (ed: much of it isn't directly linked to PC sales, but to Office subscriptions/volume licenses), and sees Chromebooks and cheap tablets eating into Windows' computing share.
- Going into today, shares had risen 56% since Steve Ballmer announced his retirement plans in August 2013.
Wed, Nov. 19, 5:20 PM
- Per the terms of a new 5-year deal with Mozilla, Yahoo (NASDAQ:YHOO), whose search engine is powered by Bing (NASDAQ:MSFT), will provide "the default search experience for Firefox in the United States on mobile and desktop." The deal also "provides a framework for exploring future product integrations and distribution opportunities to other markets."
- No word on revenue-sharing terms. Google (NASDAQ:GOOG) has long been Firefox's default search provider. Google's deal was last renewed in 2011, apparently on more favorable terms to Mozilla.
- Though its browser share has fallen in recent years, thanks to both Chrome's gains and a relatively weak mobile position, StatCounter estimates Firefox still has a 12% combined PC/mobile/console browser share globally. Chrome's share is at 41%, and Internet Explorer's at 13%.
- StatCounter puts Yahoo and Bing's combined global search share at just 7.4%. However, comScore puts their combined U.S. PC search share at 29.8%.
- YHOO +0.8% AH.
MSFT vs. ETF Alternatives
Microsoft Corp is engaged in designing, manufacturing, selling devices, and online advertising to a global customer audience. Its products include operating systems for computing devices, servers, phones, and other intelligent devices.
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