What Is Wrong With Microsoft?


INTRODUCTION:

Microsoft’s (MSFT) stock has been range bound for the last decade while revenues and EPS more than doubled.  The five year period covering 1996-2001 the top line was growing at a CAGR over 20%.  In 2001 the P/E was about 40, much too high for a company whose growth rate was trending down.  The next five years the growth was cut in half. The stock traded sideways as EPS continued to rise, offset by a declining P/E.  The growth story was no more.

In light of new product cycles what, if anything is wrong with Microsoft? Is it a value trap or value stock? We’ll break down the discussion as follows in an attempt to find answers:

  • Performance
  • Catalysts
  • Financials & Valuation
  • Conclusion

PERFORMANCE:

Microsoft announced Q2-FY2013 results on January 24. We’ll touch on each division with a focus on operating income, overall results and FY guidance.

The ST (Server & Tools) segment is showing strong growth. With a five year operating income CAGR of 14% (15% for the trailing twelve months – TTM) this division could surpass Windows in about three years.  It is already larger from a revenue perspective pushing Windows to third. Operating income for both the quarter and TTM ($2.1B & $7.7B) are records for this division.
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