Friday, July 20, 2012

What To Do With Microsoft Stock Now?

Reel your mind back 15 years ago.

Microsoft was dominating the computer world.  The Justice Department had seriously considered trying to break the company up based on its dominance in Windows software. And in a desperate move to try to save his company, returning Apple CEO Steve Jobs announced that Microsoft was investing $150 million in nonvoting Apple stock.

Little could anyone guess at the time that both companies were about to go in different directions.

I won't go through the whole story here - I would recommend Walter Isaacson's excellent biography Steve Jobs for anyone who is interested - but sufficient to say that Microsoft is no longer the feared company that it once was.

Even Vanity Fair has weighed in with its own negative Microsoft story:

Analyzing one of American corporate history’s greatest mysteries—the lost decade of Microsoft—two-time George Polk Award winner (and V.F.’s newest contributing editor) Kurt Eichenwald traces the “astonishingly foolish management decisions” at the company that “could serve as a business-school case study on the pitfalls of success.” Relying on dozens of interviews and internal corporate records—including e-mails between executives at the company’s highest ranks—Eichenwald offers an unprecedented view of life inside Microsoft during the reign of its current chief executive, Steve Ballmer, in the August issue. Today, a single Apple product—the iPhone—generates more revenue than all of Microsoft’s wares combined. 

If you had invested $100 five years ago in Microsoft stock, you would have (not counting dividends) about $100 today.  A $100 investment in Apple over the same period would be worth $400:

The market capitalization of Microsoft today is less than half of Apple, and many could argue that is appropriate.

But this may change as corporations move rapidly towards mobile devices.

I am a huge Apple iPad fan.  I love the ease which I can access information, and most of my commuting hours are spent on my iPad. 

But my corporate activities are mostly based on Microsoft products.  My email, web browser, and office software are all Microsoft.  Apple may dominate in the consumer market, but not in the business world, and that may very be where the next leg of growth comes from.

Microsoft is expected to generate nearly $75 billion in revenue in 2012.  Roughly 70% of Microsoft's revenue, and 83% of its operating profit,  comes from the so-called enterprise space - corporations.

If the next evolution of the computer hardware sector will be the tablet, there are several industry analysts that corporate IT departments will be more interested in Microsoft's competition to the iPad (named "Surface") since so much of their IT space is already dedicated to Microsoft products.

Not bad for a company widely viewed as a dinosaur.

Microsoft's top line is expected to grow at roughly +9% per year for the next few years, despite the gradual shift from PC's to tablets.  Microsoft throws off about $30 billion a year in free cash flow, and pays a 2.6% dividend.  And the stock trades at less than 10x expected 2013 earnings.

I don't really like working with Microsoft software - I've been spoiled by Apple - but I suspect that 5 years from now I will still be using Word to write memos, putting data into Excel spreadsheets, and making presentations on Power Point.

So it may very well be that Microsoft, and not Apple, will be the stock to own for the next 5 years.