Value Pick for 2013: Microsoft
Since January of 2011 Microsoft Corp (MSFT) shares have lost 1% while the Dow Jones Ind. has increased 13%. It gets worse when you consider Microsoft's rivals Apple (AAPL) and Google (GOOG) have rallied 68% and 15% respectively in the same time frame. Could Microsoft finally make a comeback in 2013, enough to make it worth as an investment for shareholders?
Microsoft shares have only peaked past the $30 in 2008, 2010 and last March. The stock just hangs out in the high $20 range despite how much revenue the company cranks out. It's as if Microsoft has become a cash zombie cow. MSFT drags down the Nasdaq and has been left for dead expect for old man mutual funds. The Zune, the what? Exactly. Bing! Wait, is that a search engine people use or was I just making a point?
The answer: A waste of hundreds of millions of dollars.
But what about Windows 8 and the success of everything XBOX (XBOX Live, XBOX 360, Kinect)? Doesn't matter, it's not iSexy or Google indexed. Sorry.
Microsoft shares since last summer have lost 15% because PC sales are dying and we all believe it will get worse. Microsoft needs everyone to continue to buy PCs so they will bulk down their computers with its massive yet usefull software. Its a tough sell to Wall Street.
Do you know many people rushing to buy a Microsoft Surface? If you are Windows user, are you in a rush to upgrade to Windows 8, is your company?
Despite the negativity Microsoft is beginning to look attractive with a forward P/E around 9x and a impressive dividend yield of 3.3%. No it's not grandpa's 3M (MMM) or Coca-Cola (KO), this is technology giant Microsoft and its less than 4% from its 52-week low.
Windows 8 (MSFT) is being adopted at a slower rate than Vista, and slower than Windows 7, according to usage data from Net Applications. As of last month Windows 8 was used on an estimated 1.6% of all Windows PCs. This compares with 2.2% for Vista at a similar point in its release history, and 6%+ for Windows 7.
However the buzz and truth of the XBOX 720 could be what Microsoft needs to move past the $30 share price. If the XBOX 720 is a reality in 2013 in time for the Holiday shopping season it could be enough to get analysts to upgrade the stock. Add to it tepid Windows 8 sales that will fetch billions and it could move the needle. Bloomberg reported in October that Microsoft Windows revenue over the last five years totaled $87,727,000,000. A cash zombie cow is fine by me as long as Wall Street takes the bait.
Microsoft (MSFT) sells for 10 times projected earnings for its current fiscal year running through June 2013–and eight times free cash flow. One reason for the low price is that desktop computing, where Microsoft's programs have long been dominant, is giving way to online programs accessed by cheap, portable devices, where Microsoft is only one of several strong competitors. But that shift isn't new, and Microsoft's revenue and earnings are still growing. Its net cash balance, combined with yearly free cash flow, works out to enough money to buy the entire company over the next six or seven years. Shares yield 3.4%.
Microsoft may soon prove to the world that it isn't grandpa's company. Hard to believe but Microsoft spends more on research and development than Google and Apple combined. Take a look at some of the ideas they are working on in PCWorld's Meet Microsoft, the world's best kept R&D secret. How about the Holodeck from Star Trek, amazing new innovations with Kinect, and touch technology that works on your skin. Who knows if this crap will ever make money, but then again what did we do before iPods and iPads (it wasn't that long ago)?
Bottom line: It's a leap of faith to buy Microsoft at this point but they don't need to become the new Apple. Rather Microsoft may already be the diamond in the rough that Wall Street is passing by.
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