Microsoft (NASDAQ:MSFT) was up big Friday morning on earnings news. Revenues were strong and costs pulled back from last quarter. They seem to be resuming their quest to take over the world...
Actually, this quarter is really just a bounce-back from a weak 4Q (fiscal year ends June 30). 4Q was a transition quarter from XP to Vista where revenues were weak because buyers were holding off and working off inventories but expenses were high as Microsoft was spending to launch Vista.
Just as I don't bail when a quarter is bad, a good quarter doesn't cause me to revise my estimates of value - unless it provides important new information. Microsoft did provide guidance for the full year 2008 that exceeded estimates, but it was not surprising given the launch of Vista. Now, if Microsoft were to post several quarters of 25%+ growth, then I might make some revisions, but I wouldn't expect that. Ever since they changed their accounting policies to defer less revenue and recognize more, their top line has been more volatile.
I should note that Microsoft has an embedded price hike in Vista - they structured their various Vista packages to push more buyers into higher priced tiers. That has and will continue to drive a portion of their revenue growth.
The stock has been held back in recent years. I didn't buy it because it had sold off; I bought it because it has gone nowhere for several years despite strong underlying growth. Last year, they paid out a net of nearly $28.7 billion to shareholders (net of shares issued for options), or greater than a 10% yield. That, of course, is not sustainable since they only earned $14 billion, but it is nevertheless good.
I must confess that I am surprised by the magnitude of the move Friday morning. Investors must be desperate for a little good news... the stock ultimately came back in a little from its peak. I wouldn't be surprised to see that continue in the next few days.