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Microsoft: Will IT's Jack-of-All-Trades Perform over the Long Term?

|Includes: AAPL, GOOG, Microsoft Corporation (MSFT)

US computer software and IT services company, Microsoft Corporation, has experienced a revival lately as the result of several widely-publicized new products. In June, the company launched its Bing search engine, which has seen strong growth. On September 15th, the company released its Zune HD media player to rival Apple Inc's iPod Touch. The company will also release the latest version of its Windows operating system, Windows 7, on October 22nd. All three of these recent products have received generally favorable reviews in the market. Windows continues to dominate the operating system market, with a 93% share according to Net Applications. This compares to the 5% share held by Apple's Mac OS and the smaller, but growing, Linux market share which is currently just shy of 1%. Microsoft's fiscal fourth quarter results for the three months to June 30 revealed that the company saw a 17% decline in revenue during the period compared to the same quarter in 2008. Microsoft's net income also declined, dropping 29%. Microsoft CFO Chris Liddell attributed the declines to weak global PC and server markets. Nevertheless, with economic indicators pointing towards a recovery, investors have started favoring tech stocks such as Microsoft. In order to assess whether Microsoft is a good long-term investment, we should focus on the company's long-term underlying fundamentals. After splitting the company's key long-term fundamental indicators into three groups (Business, Management, Price-Attractiveness) we run them though our proprietary StockMarks rating models. The chart below shows the output of our system over the past four years.

StockMark Ratings

SMB stands for Business StockMark
SMM stands for Management StockMark
SMP stands for Price StockMark.
SMT stands for Total StockMark - a combination of the three other ratings

We found that Microsoft ranks close to the market-average in terms of growth and long-term price attractiveness. However, the company's management-efficiency rating, comparing factors such as return on assets and earnings per employee on a three dimensional chart, falls far below the average, rating just 24/100. This is not uncommon for IT companies - as both Google  Inc and Apple Inc also have low management ratings (28 and 30 respectively)  due to high on-going R&D expense. Nevertheless, Microsoft has the lowest of the three.

Overall, we currently expect Microsoft shares to perform in-line with the market over the long-term. While the company has some interesting products coming out, Microsoft's fundamentals are not particularly attractive for long-term investment.

A summary of our current StockMarks ratings for Microsoft is available here

Disclosure: Andrew Kerr has no holdings in any of the companies featured in this article