Microsoft: Look Beyond The New Releases

| About: Microsoft Corporation (MSFT)

Microsoft Corporation (NASDAQ:MSFT) is seeing a unique opportunity to once again dominate the tech sector as it did through the late 1990s and early 2000s. Microsoft still has distinct advantages over competitors Apple (NASDAQ:AAPL) and Google (NASDAQ:GOOG). The advent of the new tablet Surface, new OS Windows 8 and the Windows Phone all offer a potentially lucrative opportunity for Microsoft to regain its leadership position in the tech industry.

But investors should look beyond these new developments. Microsoft's strong financials, specifically its decreasing debt to equity ratio, above industry average dividend, and increasingly stable margins indicate that it is moving in a very good direction. This article will focus on why investors interested in the tech sector should seriously consider adding Microsoft to their portfolio today.

Microsoft's beta is around one, while it's PEG ratio is slightly over one. Its current price around 9.7 times earnings has decreased from the trailing 12 months price of around 10.9 times earnings. Microsoft's sales growth has increased by almost 6 percent from the previous year, but decreased by more than 16 percent from the previous quarter. Its current ratio and quick ratio are very close; both are slightly less than three. Return on equity decreased by less than 10 percent from Q4 2011 through the end of Q1 2012. Operating margin and net margin were more stable and only decreased marginally through the same time period. Microsoft decreased its debt to equity ratio by around 10 percent to 0.17 from Q4 2011 through the end of Q1 2012.

Microsoft's dividend yield is around 2.65 percent. This equates to a rate of around $0.80 annually. This dividend yield is considerably higher than the industry average. Microsoft's projected growth rate for next year and the next five years are around half of the industry average. Microsoft's trailing 12 months price to earnings ratio is around 80 percent lower than the industry average. Its price to book ratio for the most recent quarter is slightly less than 3.7, while the industry average is over 2.7.

Microsoft's price to cash flow ratio is slightly more than half the industry average. At slightly less than 32 percent, Microsoft's trailing 12-month net profit margin is around three times more than the industry average. Its return on equity for the same time period is over 37 percent, this is more than double the industry average. According to its financials, its clear to see Microsoft is undervalued on the market in comparison to the industry. It also has substantial margins and liquidity while effectively managing its level of debt.

Microsoft recently announced a $6.3 billion write-off from the failed acquisition of aQuantive back in 2007. This was at the point when Microsoft was attempting to compete with Google in the online advertising sector. The advent of Facebook (NASDAQ:FB) and evolving internet decreased the value of online display adds by more than 50 percent from 1998 to 2007.

The write-off was also due to Microsoft's failed attempt to capitalize on incorporating the ads effectively into Bing as Google has done with its $3.1 billion acquisition of DoubleClick. Microsoft remains committed to cutting into this market share eventually, but has yet to divulge its new plan for advertising success. Microsoft has a long-standing relationship with Facebook and has popular sites like Bing, the MSN network and products like Xbox that have advertising potential. Microsoft is currently down, but not out of promising potential to capitalize on premium advertising in multiple mediums.

There are a few important things for shareholders and interested investors to note about Microsoft. It's increased its dividend and net income each by 15 percent annually for the past six years. Microsoft is also one of four AAA rated firms in the world. In 2011, Microsoft generated around $27 billion in operating cash flow. Microsoft spends this money paying off debt, on buybacks and dividend payouts. Windows 8 goes on sale in October; Microsoft expects around 500 million users by the end of 2013. The Surface tablet will hit the market in late summer or early fall. Microsoft's Office 15 suite will hit the market in Q4 of 2012. Sometime in 2013, the Windows Phone will be released as well.

Windows is till the standard OS and most popular among corporations and business professionals. Microsoft still offers a more complete, secure and sophisticated OS and Office suite than both Google and Apple. Microsoft also recently lowered the upgrade price from Win 7 to Windows 8 to $40, only $20 more than Apple's upgrade.

Both Research In Motion (RIMM) and Nokia (NYSE:NOK) have been struggling recently, Microsoft has already given money to Nokia to help with R&D. Microsoft has capital to purchase either Research in Motion or Nokia. Google is still attempting to get approval to sell its App suite to federal organizations. This Surface tablet is to Windows 8, as the PC and mouse was to the original Windows OS. The Surface will have a built in kickstand, built-in flexible keyboard and USB ports.

This tablet is intended to appeal to the professional businessperson that wants a tablet instead of a laptop. It will be available in both Windows RT and Windows 8. This is a more sophisticated and complete tablet PC than Google's Nexus 7 and Apple's iPad, both of which are more geared towards entertainment purposes. Acquiring Research in Motion or Nokia would put Microsoft in a position to completely control and manufacturer its own phone much like Apple, in contrast to Google, which has yet to accomplish this feat.

Microsoft has software and services more applicable to professional use like its Microsoft System Center 2012, powered my Microsoft private cloud technologies. EmpireCLS Worldwide Chauffeured Services was able to use this service to manage its own business, and then create an innovative dispatch and reservation system that it can launch to a public cloud and sell to 3,000 ground transportation companies worldwide as SaaS.

In short, Microsoft is in position to revamp its premium ad campaign and operations, launch a touchscreen capable OS compatible with a mouse, phone, tablet or PC. It could be producing its own phone like Apple and own tablet that has more connectivity in conjunction with a more sophisticated, familiar and professional Office suite upgrade.

Microsoft's potential still lies in its ability to transcend the consumer market and continue to dominate the business enterprise sector. Shareholders should hold for the long term for continually increasing dividends, while investors should buy now before the fall of 2012.

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

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