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Microsoft: An Investment Choice for the Long-Run

May 12, 2014 | About:
Riddhi Kharkia

Riddhi Kharkia

1 followers

A recent article related to Microsoft (MSFT) sparked reasonable concerns among investors. The reason being that Mr Steve Ballmer has replaced Bill Gates (Trades, Portfolio) as the largest individual shareholder in the company.

This is an excerpt from the said news article:

Former Microsoft chief executive and board chairman Bill Gates (Trades, Portfolio), now super philanthropist, has officially lost his place as Microsoft's top individual shareholder. Gates, who sold about 4.6 million shares of the company this week, is down to around 330 million in total. Former CEO Steve Ballmer and his 333 million shares has now taken the top spot for Microsoft shareholders.

As the Financial Times notes, this is the first such time since 1975 where Gates has not been the biggest shareholder in the company he originally co-founded. Ballmer, who was Microsoft's 30th employee and Gates's first business manager hire, eventually succeeded him as CEO of Microsoft in January 2000.

No Reason to Panic

Ballmer, who was at the receiving end of sharp criticism for the way he had led Microsoft, especially for his decision regarding the Surface tablets and the miserable failure of Windows 8 operating system, stepped down as the CEO in August 2013. Since it is thing of the past and the market would not concern itself it with past data, the important thing to unravel is the future direction of the company under its current CEO, Satya Nadella. Also, it is important to bear in mind the continuing sell-off by Bill Gates (Trades, Portfolio) as it could have considerable implications on stock movement in the near term.

First off, it is important to understand that this selling activity being pursued by Bill Gates (Trades, Portfolio) would not have any major repercussions on the operations of the company or the stock price in the long run. The company is now in post Gates era and the dynamics of the software industry have undergone a tumultuous change since his departure. However, it is still possible, that the stock may experience some volatility in the coming months because of erratic reactions of the investors. Hence, it is for the investors to choose their sweet spot with regard to tolerance for volatility before putting money in the stock.

Solid Third Quarter

As I mentioned above, the stake sale by Microsoft’s founder Bill Gates (Trades, Portfolio) is irrelevant with respect to stock movement. Hence, let us turn towards the performance of the company in the third quarter, the results of which were reported on April 24. In quarter three, overall revenue came in at $20.4 billion, up 8% year over year after taking into the effect the impact of FOREX fluctuations. The gross margin expanded by 300 basis points while diluted EPS grew by 5% to $0.68. The solid results beat analyst estimated by a whisker that sparked a slight upside movement in the stock in afterhours trading.

Surfacing Better Performance

One of the biggest highlights of the call was a jump of 50% in revenue to $500 million from the Surface tablets division. It is a significant achievement because last year, the company had to write down $900 million in losses on Surface tablets inventory because of an over-valuation. In fact, this incident was majorly responsible behind Ballmer’s decision to step down as the CEO of the company. However, since the takeover of the top position, Satya Nadella has focused on hard selling and innovation in hardware and software components of Surface. Also, the launch of Surface mini tablet is going to happen soon and if Microsoft can achieve credibility with this device then it could strengthen its foothold in smart devices market.

Besides the Surface in tablets segment, another interesting story to absolutely watch out for would be products released by the Nokia-Microsoft alliance. As this news report states, the Nokia Lumia 630 is set to become Microsoft’s first smartphone to ship with Windows 8.1 from day 1. This is a big development for Microsoft as it has been struggling to sustain the demand for its Windows RT (Windows 8 software for mobile devices) software and had bought Nokia’s devices and services unit for a whopping $7.2 billion in hope of creating its own handsets loaded with Windows OS. While we are yet to see the reception of Lumia 630, the definite thing is that this alliance can provide fierce competition to current giants including Apple (AAPL), Google (GOOG) and Samsung (SSNLF).

Other Smartphone Makers

It is widely rumoured that Apple will release the iPhone 6 in this year or early 2015 and while nothing can be said about the release date but one thing for sure is that this is the most anticipated phone from the stable of Apple in its long history. On the other hand, Google has steered away from manufacturing of handsets by unloading the Motorola mobility division to Lenovo. Even though Google made some notable changes in the company, Motorola was bleeding money within the search giant and hence, management decided in favor of selling off the ailing division.

Final Stand

In conclusion, I would say that Microsoft has regained some ground under the leadership of Satya Nadella and the company has some lucrative prospects in the future. Surprisingly, Microsoft’s share crossed the $40 mark this month, a level reached after a long time. Thus, Microsoft is an ideal long-term candidate for your portfolio.

About the author:

Riddhi Kharkia
A practicing Chartered Accountant based out of India. I have keen interest in analyzing tech stocks that are driven by value.

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