Microsoft Corp (MSFT)

Interesting chess match chess match between Microsoft and Yahoo.

Microsoft's revenue increased from $44.3B in 2006 to $51.1B in 2007, because the Zune division finally become profitable, Xbox 360/Live division flourished, and software sales. In term of software, people love to focus on Vista. True, it wasn't well received and illegal pirated copies exist, but it is still the second best selling operating system of all-time behind XP, Windows 7 is going to be released within the next couple of years, and Microsoft makes a lot of other software (such as Office) that also makes a lot of money. In addition, despite my prediction that (1) for gaming the PS3 will outsell the Xbox in 2008 and (2) for mobile OS, Google's Android and Apple's OS for the iPhone will start to take more marketshare, Microsoft is still going increase revenue at least through 2009 by at least a $6B per year increase.

MSFT used to be at around $36, but it has dropped YTD 18% because of (1) uncertainty with the Yahoo! bid and (2) it is part of the technology sector which gets hammered during a recession. My prediction is that once the Yahoo fiasco is over, the stock will immediately jump from $29 to around $32+, because this is where it was before the bid and there was no other catalyst pushing the stock price down. From there, the price target is about $40. Currently the stock is cheap. Its current P/E is 15.51, which is not only less than its industry's average (16.58), but the lowest it has been since 1996. If you take into account growth, its PEG is still only 1.21, that is about average for its industry and sector. Microsoft should be trading at a premium. Moreover, Microsoft has beat analyst earnings the past 7 quarters and EPS trends for the current quarter have been revised to increase the amount from the estimate 90 days ago. You don't really have to worry about the shorts pushing down this stock either, because only 1.50% of the shares are being shorted. During a recession, the tech sector doesn't perform well, but MSFT, RIMM, and AAPL are my bullish exceptions.

Things have turned around at Microsoft. Windows 7 is a hit, I've been using it for a few months and the productive increase justifies an upgrade. The Xbox 360 is the best value gaming console on the market. The new Zune and Zune marketplace are actually better than Apple's offering. Expect the next version of the Zune to turn heads. Live is actually starting to look like a service and the new WPF is very promising for the enterprise.

Apple will never succeed in the workplace, why? because they lock you in and refuse to let you out. The iphone is the perfect example, no VMs, no interpreted code, only the appstore or nothing. Apple is the perfect example of the company everyone was afraid Microsoft was becoming in the 90s. A big goliath that wouldn't play well with others. Well, Microsoft is starting to play with everyone else and it can only be profitable to the shareholders.

Plenty have mentioned it - this company's cash horde (there is no other word) gives them a tremendous advantage. They have some 30 BILLION dollars in cash sitting idle. At that rate they could stop making any money right now, and still go on investing and developing new products for the next DECADE before running into any serious cash problems. Don't underestimate the value of defenses like that.
As for their moat: realize that many corporations in this country and abroad haven't upgraded to WindowsXP yet, so it doesn't really matter when Vista launches. Most corporations wait until all the security bugs are shaken out before upgrading their enterprise. How many Fortune 1000 companies are running open source solutions on their desktop? How many of them are going to let Google or some other company host all of their sensitive data for them outside of their firewalls?

Disclosure: I work full-time for Microsoft.

I work with mostly Fortune 1000 clients, many of which are waiting patiently to switch to Windows 7. Where I heard resistance to Vista, I'm hearing a rush to Windows 7. All I'm being asked on a daily basis is "When will it be released?"

I'm talking tens to hundreds of millions of copies that will be sold in the next 1-2 years. Hardware refresh cycles are ending their useful life, stretched out by the recession, and now companies need to buy new computers. Do you think they will be buying Macs or Linux instead?

Maybe a few percent will, but most will stay with Microsoft Windows. Macs are not enterprise-ready. They have nothing close to the configuration and management control that you get with Windows and Active Directory. For example, Internet Explorer has 1200 settings you can configure and control. Apple Safari has a few dozen. And it's that by every piece of software you can install.

These companies have billions in invested in custom software, software that cannot easily be ported to the Mac or Linux. Linux and BSD (I use OpenBSD at home on some of my computers) has been trying to break out for over a decade...to what something like 5-6% marketshare? I installed Ubuntu on my mom's computer as an experiment, and set it up like a near-XP clone with everything she needed as an icon on the desktop. A few weeks later she made me switch her back to XP. She said I was the only person she knew that could support her, and she loved Outlook. Thunderbird just didn't do it for her.

I've got huge tech head friends in Microsoft, the tech guy's tech guys. The people I trust to tell it like it is. And they love Windows 7. They've already converted their production machines to Windows 7. Some have been running that way for over a year. You can think that I'm pushing marketing hype to you, but talk to any IT person you know inside of a mid-size or large company and ask them what OS management is planning on going to over the next year or two.

There is huge pressure building to upgrade when Windows 7 comes out. You watch. You heard it hear first.

NoseDive likes.

THIS IS NOT A GROWTH STOCK. If it tries to expand the govt will imasculate it. Bill left after he either ran out of ideas or couldn't make them happen. Don't tell me Balmer is a visonary.

undervalued

Bill Gates is done selling shares (well, most of them anyhow) having gone from an insider position of 40% down to 10%. He's busy worrying about Buffett's money now, too. Projected return = 19% on 8/24/2006.

I look at the revenue distribution of Microsoft (http://www.sec.gov/Archives/edgar/data/789019/000119312507225854/d10q.htm#toc29077_5) and cannot imagine them maintaining their lead over next 5-10 years in any of the segments except Entertainment (if that).

(In millions) 2007 2006
-------------------------------------------------------
Client 4,045 3,315
Server and Tools 2,902 2,496
Online Services Business 671 536
Business Division 4,108 3,423
Entertainment 1,928 1,010
Unallocated and other 108 31

Let's see the segments one by one.

Client : This is essentially Windows. Anyone who has even read basic networking architecture knows that there are two kinds of client (thick client and thin client). Thick clients are ones who have logic residing in the machine being worked upon by the user (currents OSs) and thin clients are one which have logic residing on the server and the client simply talking to the server (think email, Google Docs, online reminders etc.). Thin clients will become more and more popular due to exceptionally better online apps and increasing ubiquity of wireless networks. This makes sense too as this way computing power doesn't have to packed into individual user's CPU, thus bringing down the price of user computing entity. OLPC is a good botched example of what it can be. Microsoft seems to be running in the opposite direction here, making machines bigger - 2 GB RAM now comes recommended - wtf?
Most individual users use their machine to browse internet, write docs, listen to music and watch movies. We don't need a 2 GB, 2.6 GHz Core Duo leviathan to do that. OLPC has shown that all this can be packed into a little bundle. If someone implements this well and sells this - there's a market gestating for this. In 3-5 years, I am sure well have stunning thin-client machines which will have no hard-disk, simply 8 GB of RAM (so forget about memory swap) with maybe 15 client programs built in.
Even without this, OS X is eating into the segment. So, this is a going down.
You'll say, dude, you're talking only about North America and Europe. What about emerging countries? They do use Windows and will use it - that's a market. You're right that there is a market but very few of us have an idea how swiftly technology moves in developing countries. These countries' buying habits are very discerning and price is an important factor. Every year I go back to India for a visit, there's a new way of connecting to internet, a new service and new hot product. A better and cheaper alternative will swamp the market is a way never seen before, as anyway PCs have a shelf life of 2-3 years, so there's little chance of current product's entrenchment.

Server and Tools : This will have ho-hum growth, if that. Compatibility and single platform means a lot to even mid-size offices, so if they have their servers on Windows platform, they would buy the tools till the point they are sick of it. This is a very entrenched market and will not dilute easily. But, move to Java and open-source options is well-documented. My team runs 3 million-hits-a-day websites and we use Linux and Apache. Hiring a MS guy is also difficult, while on other hand Java is the de facto language. Ruby and stuff is on an upswing, only to eat into MS Server.

Online : Let's just save time here. Live bombed, msn.com is ho-hum.

Business : Ah, the other big boy, Office. (1) Most people don't use more than 10% of the features of Office; (2) Office has open standards now. This means we will have a lot of programs coming which do the most common 10% and eat away a significant amount of market. Also, things like Google Docs only makes having a client software unnecessary. Unless they have a program in line to put Office online, this is going to s**tter pronto. On second thoughts, they MUST have. But we have seen how good MS is in putting out online products.

Entertainment : XBox. Hope they don't screw this up. I don't like the company much but I would like to see it go out with dignity.

Unallocated : No point discussing potential rounding errors.

So, if you have a boring view of investing (i.e you talk in multiples of 5 years), I would love to hear your bull pitch.

Whether people like it or not, sooner or later they will have to move to the Vista operating system. These days, having multiple operating systems on one computer is clunky. Most people will just buy a new computer. I think the big surge of new orders will start in the holiday season at the end of 2007. Once an expanding number of people get new computers with Vista and learn its advantages (assuming there are any), then other people will want it. These days it doesn't pay to upgrade a computer. It's nearly as cheap to buy a new one, and that's what people without Vista will do. Also, an important factor is that the more expensive versions of Vista have security features lacking in XP, including an encryption method that requires a new chipset with a Trusted Processor Module. I don't think XP machine hardware will be able to take full advantage of the encryption, although I am not sure. In any case, my view is that starting in late 2007, everyone will start to upgrade to Vista, and I think there should be at least three generations of Vista within the next few years sold as upgrades and not service packs. This year's initial Vista rollout won't earn vastly more for Microsoft as such, because the number of Vista sales is pretty much linked to the number of new PC sales. But I think the PC sales will increase in 2007 because of increased global demand in general and also peoples' need to buy a new computer with Vista on it, for performance and features. Microsoft also generates a lot of money from add-ons like Visual Studio and documentation. I think there will be more purchases of upgrades to those software packages than usual, because everyone will eventually want add-on software that operates seamlessly with Vista. In the very long run, I think public domain software, such as Linux, will gain market share, but I don't see that happening for another few years. Google or other companies could make shared software available on the web, but this is just reinventing the wheel. Remote access to software was called timesharing back in the 1970s, and there is nothing wrong with it, but lightning speed will be dominated by desktop-based software until we get optical fiber to every home and start using gigabit rates. and that could take another decade. All Microsoft has to do is avoid mistakes in order to continue secular revenue growth. They will probably do another divided or a buyback to burn some of their cash, if they can't find suitable acquisitions. One downside to Microsoft is that their Visual software methodology, based on property grammars and object-oriented programming, sometimes interacting with the Windows registry hive, is a complex, Tolkienesque approach to programming. I do not know if it is viable in the long run because of the complexity, and that is one reason why Linux and its associated software may win out in the end. For those of you who aren't computer dinosaurs like I am, please note that nearly all the so-called modern software on PCs, regardless of the vendor, is essentially a rehash of concepts that have been around for over 30 years on "big iron" mainframes. As someone who used to program mainframe software, I am horrified by the poor reliability, slow speed (given the hardware's clock rate) and labyrinthine operations of much of today's PC software, but I don't see big iron as coming back anytime soon, except perhaps after fiber puts instant computing power on every desktop, so it doesn't matter where the cpu power resides.

Microsoft needs to Yahoo to gain the game to Google, or otherwise Google indefinitely continued exceeding to both.

Microsoft has successfully entered the video game market in recent years, and the Xbox 360 is selling pretty well. Also, Windows Vista might be a bad operating system, but people are still eventually going to buy it. Other operating systems like Mac and Linux just seem really foreign to a lot of consumers, and many people have known nothing but Windows their whole life. I think this is a solid company now is as good a time to buy as any other.

Also, I think that Microsoft won't just give up in its quest to compete with Google, and one day, they might just have a quality search engine that makes some money for them, maybe even Yahoo still.

Microsoft has the depth of experience that is necessary to keep abreast of the market. If they start axing the employee bloat it will be make them a lean and mean figthing machine. In a recession they have set themselves to weather the storm by planning for continued product replacement.

Microsoft has been on top for a long while and while many feel Vista will lead to tremendous loss for them in the next year they will begin to see the install base increase and revenues increase. The release of SP1 was awaited before many corporations were willing to invest the infrastructure to upgrade to Vista.

Look at the 52 week range for MSFT, it is only a $10 difference between the high and low.

This is a rock solid stock that is too heavy to grow anymore. With a $277 billion market cap, it would take many many years for this stock to double.

Plus Apple is going to continue gaining Market share as XP will no longer be sold, and Vista is obviously a failure. Apples retail stores are gonna continuously eat away at their market share, and their marketing & brand are getting even stronger. Everyone I know wants a MAC, everyone I know who has Vista complains all the time.

And their dividend is horrible. There are plenty of other huge mega companies that are willing to share excess cash with you, Microsoft is NOT one.

People who caught this early on are probably filthy rich and not playing CAPs, but no one will get rich from this stock anymore. It might be a good company, but it still won't be growing a lot.

Microsoft is not worthy of your investable money and over time the S&P 500 will do better.

I recently downloaded Microsoft's answer to Google Earth. I can't remember the name of the software now. I just remember that it took me 20 minutes worth of multiple downloads and install retries which culminated in a blue-screen when I tried to run it. Google earth took maybe a minute to download and has always run flawlessly. I've got Google Earth installed on my Palm OS based smartphone, and it runs flawlessly there too. My point here is that Microsoft never gets it right on the first try. They put out an initially buggy product that is gradually fixed over several years. That works when you're the only game in town, but the game has changed. It's no longer an OS-centric world. Now the browser is the OS, and thanks to technologies like AJAX, browser-based applications are approaching the look and feel of desktop applications. End users don't know or care what server platform feeds the application to their browser, they just care that it works. Microsoft will soon be shipping Vista, their latest and greatest (and much delayed) desktop OS, which they promise will offer a gee-whiz, gotta have it users interface with such doodads as transparent windows so you can see what's going on underneath. The only caveat is that being able to run Vista will most likely require ditching your current computer. Of course, you could save some money and stick with your current XP machine, get your work done like you do now, and not have transparent windows. But how many people would be happy doing that? A lot, I think. Most, actually. XP is good. It doesn't crash like 95 and 98 did. Sure, there are security issues, but I don't think Vista is going to cure them. Microsoft should have seen the writing on the wall and concentrated on software for the browser like Google has been. Instead they hoped they could delay the inevitable by keeping us tied to the OS. I don't see it as a viable strategy. They're not going to go away any time soon, but I see no reason for their stock to go up.

Microsoft faces daunting competition in every sector it plays in. While the XBOX 360 has been very slow to take off, the gaming market is going to do nothing but become more difficult. The PS3 will cripple the 360's slowly building momentum.
Microsoft is also slated to release a new operating system, Vista, only to have consumers realize that very few computers currently in the market will run anything but the basic Vista software. An intense grafics processor is required, which makes putting Vista on a laptop (the growing PC market) very expensive and out of range for the casual user.
Lastly, Zune is being touted as the most likely contender to dethrone the IPOD. While it will be a solid second place in the market, Microsoft has waited too long to enter the PMP market and has given the IPOD a foothold similiar to what Microsoft owns with it's Window's software.

Micosoft is a hard stock to rate because it covers so many sectors of the tech market. From Vista, software, applications, code libraries, XBox, to live.com and online ad revenue, Micosoft is a tech conglomerate. However, based on Microsoft's increased concentration in web search technology and ad revenue, I expect Microsoft to compete with Google and return a quite profitable search engine business in the next few years. In addition, Microsoft has proven to its customers that Vista is the supreme operating system (Check out http://www.mojaveexperiment.com). Microsoft is a must buy stock for the next few years.

Windows 7 is either going to be late, or seen as nearly identical to Vista. Those using XP now will see little if any reason to switch to the new OS, and some may even go to Apple. The only thing going for them is the Office Suite of software, which has been a continual winner for them, but is hardly enough to keep things going if the new OS performs worse than Vista has; and given that Dell is selling units with XP as a $120 'downgrade option', it's nigh-on impossible for Windows 7 to do worse, but Microsoft is bound to live down to expectations.

The Microsoft Games division has consistently put out crap which few purchase, and the Windows Mobile OS seems destined to be turfed by the versions used by Apple, Google, and RiM.

One wonders what they are going to do for cash when they release most of the Office Suite as on-line freebies in a year's time?