Microsoft (MSFT)


Trying to figure out if Microsoft is a good investment going forward is not an easy task, especially considering its performance over the last few years and any conclusion could be completely wrong.  Has the economic downturn provided a good opportunity to own a company that is a major cash cow with a dividend that is becoming more attractive as the stock pulls back?  Or will the downturn get worse?  Even a worsening economy could benefit MSFT considering the strength of their balance sheet.  A worsening economy could devastate the stock prices of companies with weaker balance sheets (think financials), of course MSFT stock holders would also suffer, but probably recover quicker at any real sign of a recovery.  A continued downturn could provide MSFT with attractive M&A opportunities.
 

I’ve also heard the doom and gloom drumbeat that MSFT is losing market share because they just are not nimble, innovative, (pick a term) and over time the company will continue to deteriorate.  I’ve heard this in some form or another for several years now which might have played a (minor?) role for the lousy stock performance over the last five years or so.  So I went back and looked at their segment revenue since the September quarter 2006 to the most recent quarter (03/31/09).  Considering seasonal sales issues I used a four quarter moving average (trailing twelve months – TTM).  Here is a table of the running totals (revenues – TTM) over this time period.
 

Revenue (TTM) in millions

06/07

03/09

%Growth

Client                     14,965                         15,436      3.1%
Server and Tools                     11,175                         14,365     28.5%
Online Services Business                       2,472                           3,194     29.2%
Microsoft Business Division                     16,380                         19,604     20.0%
Entertainment and Devices Division                       6,089                           8,139     33.7%
Unallocated and other                           41                             437  

 

Putting aside the client segment for a minute this is impressive growth considering the economic climate.  They could report numbers for June that may bring down the TTM numbers and probably will IMO, but the picture appears quite good.  I expect the TTM average to come down somewhat but these segments appear strong and could do well once a sustained recovery is underway.  They seem to be holding there own plus some IMO.

The client segment average showed a slight upward trend but we all know the problems with Vista.  I still have XP.  What is surprising (to me) is the client segment held its own up to June 2008 based on individual quarters and the TTM started its downtrend in 12/2008.  We know Vista was not well received but how much was due to actual loss of sales vs the economy and customers waiting for Windows 7 is anyone’s guess.  Windows 7 is getting good reviews so we could see the client segment start to rebound if it is well received, or received better than Vista was which seems like a no brainer at this point.  This next product cycle is starting to look up IMO.
 

Bing is also receiving good reviews.  I was always a Google user for search but I find myself using Bing as my primary search and yes I still use Google as my backup.  I don’t see Bing as a present threat to Google but it could start to seriously impact Yahoo search.  If so it could put Yahoo in a much weaker negotiating position with MSFT, assuming they are even talking.
 

The economy is muddying the waters since it is impossible (for me) to separate if customers are defecting from Windows forever vs the economic impact on sales.  I’m going to guess that MSFT will do fine with the next product cycle and once a recovery starts but things could get uglier until the global economic recovery becomes obvious.  Time will tell.
 

That said here is all the raw data I used to base my opinions on, yes, pure opinion from an average joe retiree trying to find good investments, not easy these days.  On a side note I found features for blogs, website construction, etc on MSFT’s live site, etc., something that does not seem to get much press but offers a lot, (free) including 500MB of web space. I can only guess it is to draw people to their search and other products which could play well going forward.  I don’t think techies will like it but for layman such as myself it’s easy to create an attractive web presence not to mention all the other free services offered.
 

  09/09 12/06 03/07 06/07 09/07 12/07 03/08 06/08 09/08 12/08 03/09
SEGMENT                      
Client 3,315 2,669 5,279 3,702 4,045 4,238 3,924 4265 4,048 3,850 3,273
Server and Tools 2,496 2,847 2,755 3,077 2,902 3,284 3,260 3743 3,405 3,748 3,469
Online Services Business 536 625 622 689 671 863 843 837 770 866 721
Microsoft Business Division 3,423 3,512 4,833 4,612 4,108 4,814 4,747 5269 4,947 4,881 4,507
Entertainment and Devices Division 1,010 2,968 947 1164 1,928 3,060 1,576 1575 1,814 3,183 1,567
Unallocated and other 31 (79) -38 127 108 108 104 148 77 101 111
                       
Consolidated 10,811 12,542 14,398 13,371 13,762 16,367 14,454 15,837 15,061 16,629 13,648
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One Response to Microsoft (MSFT)

  1. Daniel says:

    And then you have not ignorant but rather "sophmoric" analogies like this.By John C. DvorakBuzz up!on Yahoo!The glory days of Microsoft ended with Vista for one reason, and one reason only: Vista Ultimate. It was part of an ill-advised scheme called "subtractive marketing" or "fake versioning"—purposely taking features out of a finished product to create an artificial range or selection.This is like selling a car that is complete and loaded with everything when it’s manufactured (we’ll call it the Lincoln Ultimate). But you need a downgraded version of the car, so after the Lincoln Ultimate comes off the assembly line, you rip out the leather seats, discard them, and put in cloth seats, in order to sell the car for less money. You could have just as easily left in the leather seats. It would have been easier on everyone!

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