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Microsoft: Off to the Races

January 06, 2012 | About:
The Science of Hitting

The Science of Hitting

260 followers
Value investors have been pounding the table on Microsoft (MSFT) for quite a while now. In 2011, the highlight was when value investor David Einhorn, at the Ira Sohn Conference in May, called for for Steve Ballmer to be ousted as CEO at Microsoft. Yet despite a lot of talk about tablets, the cloud and the future of Windows, the overall result was another disappointing year for Microsoft’s stock price: In 2011, it fell roughly 7%, compared to a flat market for the S&P and a 5.5% gain for the Dow.

2012, on the other hand, has started off with a bang, and brought some long-awaited stock price appreciation for patient investors. In the first week of the New Year, the S&P and Dow gained 1.6% and 1.2%, respectively, compared to a jump of more than 8% in MSFT.

One possible explanation is a change in analyst perception, with Credit Suisse issuing a report with a positive outlook for the future of Microsoft’s partnership in mobile with Nokia. "We fundamentally believe that Nokia's focus on Windows will allow [Nokia] to drive a recovery through 2012 in both its top-line and earnings," Credit Suisse wireless analyst Kulbinder Garcha wrote in a note to clients, including an upgrade for Nokia. As expected, Nokia & Microsoft have plans to invest significant amounts of cash in promoting the new phones ($200 million), with payments to sales rep expected to start mitigating the promotion of Android and Apple products.

With 2012 upon us, the catalysts for appreciation in Microsoft’s share price are abundant: the release of Windows 8, the potential to gain share in mobile, the continue drive in Bing share gains, and the possible retirement of Steve Ballmer after the release of Windows 8 (as has been rumored); for Microsoft investors, the first week of trading was hopefully just a preview of a successful year ahead.

About the author:

The Science of Hitting
I'm a value investor, with a focus on patience; I look to buy great companies that are suffering from short term issues, and hope to load up when these opportunities present themselves. As this would suggest, I run a fairly concentrated portfolio by most standards, usually with 8-10 names; from the perspective of a businessman rather than a market participant / stock trader, I believe this is more than sufficient diversification.

I hope to own a collection of great businesses; to ever sell one, I would demand a substantial premium to the average market valuation due to what I believe are the understated benefits to the long term investor of superior fundamentals and time on intrinsic value. I don't have a target when I purchase a stock; my goal is to replicate the underlying returns of the business in question - which if I've done my job properly, should be very attractive over many years.

Rating: 3.8/5 (24 votes)

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Comments

jaumepared
Jaumepared - 2 years ago
Value Investors like MSFT because of huge amounts of free cash flow. Conversely, we are wary because of the limited success they have had deploying in areas other than than Windows and Office.

Those legacy apps can be milked for decades. The real question is whether Balmer can maintain the dominance of both of those and create even one more mega success. BING ain't it. Gaming may be it. BING and telephony are surround sound defensive measures.

Why not shed break even and losers and re-deploy cash for shareholders.

The Science of Hitting
The Science of Hitting premium member - 2 years ago
Jaumepared,

I certainly agree with you; I'm still in the camp of issuing huge amounts of debt (as Whitney Tilson noted in a CNBC interview, this company does NOT need $50B+ in net cash based on their consistent CF generation) and buying back stock by the billions. Intel, for example, bought back $10B in stock year to date, by issuing debt at a rate of less than HALF their current dividend payout; why Mr. Klein (CFO at Microsoft) isn't pushing Ballmer to do the same at MSFT is unknown...

As for Bing, mobile, gaming, etc, we shall see what happens... thanks for the comment.
steven149
Steven149 - 2 years ago
I don't think telephony and BING won't help MSFT. High up at MSFT understand, I think, they won't have the efficiency and talents to develop another generation of cash cows like Windows and Office (Paul Allan's book as a reference). But they really want to get into mobile computing business to compete with Apple and Google. That is why they bought Skype (I think it is overpriced though) and support Nokia's smart phone software. Skype can be a game changer if combined with Nokia's software. The combination may grab a huge chunk of market share from current wireless carriers as well as mobile computing as a general. Once this strategy is on track, BING is the second wave attack on mobile computing's searching business. I think the game is just on. This is my interpretation of their series of acquisition strategy and I think it will work conditionally. The potential problem is execution. They need strong hands to steer the ship.

On the other hand, I think gaming has saturated. It is one of the current cash generator. But , no, it won't be the next cash cow.

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