The rescinding of Steve Ballmer as the CEO of Microsoft (NASDAQ:MSFT) has finally started showing some effect. Microsoft’s share prices have appreciated by around 35% over the past one year. This is not all the good news, the shares now offer 18% return for S&P 500 Index. Through this article I would like to analyze the reasons for Microsoft’s solid performance.
A Much More Formidable Market:
A strong performance recently by the PC market has but proved one thing: the good ol’ PCs aren’t yet done and dusted with. This also shows the amount of stability in the market presently. If we remember, Q2 2013 recorded the biggest decline in the PC market ever since the commercialization of PCs. Microsoft’s PC business alone declined around 13%. This year however, the figures have changed. The expected decline in business for the tech giant in 2014 is just 3%. Both Lenovo and Hewlett Packard have recently reported better than expected PC sales and revenues from the same. The experts owe this to the fact that Microsoft is finally ending their support for Windows XP in April 2014. The analysts have predicted that the decline in the PC sales for this year would not be huge. In fact there are forecasts that the PC market is going to be a lot more suitable and better for expansion because the consumer demand is expected to be stable. It is also believed that the stabilization trend will materially benefit approximately 40% (in terms of revenue) of Microsoft's businesses that are still tied to consumer and corporate PC markets.
- Warning! GuruFocus has detected 10 Warning Signs with MSFT. Click here to check it out.
- MSFT 15-Year Financial Data
- The intrinsic value of MSFT
- Peter Lynch Chart of MSFT
A Much Better Business Strategy:
Microsoft earns more than 75% of its revenues from its enterprise business. In fact over the last one year there has been a rise of around 60% in the revenues earned by the company from this segment. This segment of the company’s business is expected to generate around $200 billion in revenues by 2016.
The tech giant is currently in its early stage of Windows Azure and Office 365 product roll-out. Windows Azure is currently sold as both infrastructure-as-a-service and platform-as-a-service and has brilliant industry revenues CAGRs from 2011 to 2016 of 42% and 27%. The Office 365 product is being sold as software-as-a-service with expected industry revenue CAGR of 19%.
The price appreciation has narrowed the forward P/E multiple gap between Microsoft and S&P 500 Index from 37% last year to 10% presently. Besides this, the company has a long-term earnings growth estimate of 8.5% which is in line with the average of 8.7% for S&P 500 companies. The company also has an above average profitability and cash flow performance. The above 3% return on investment rate is also higher than the very average 1.9% for most of the S&P 500 companies. All in all, the present growth figures coupled with a brilliant return on investment makes MSFT a priced possession in 2014.