Buy Microsoft (MSFT) before the Windows 8.0 Release

by admin on August 24, 2011

It seems that nobody loves Microsoft anymore.  A pile of bad decisions and no breakthrough products over the past several years have kept the stock moving sideways since March, 2003. At that time, the stock was trading at $24.67, basically the same closing price as yesterday at $24.72 (08/23/2011) This is a seven-year ride of the stock going nowhere, making it the best example of a value trap in recent history.

On February 19, 2003, Microsoft started to pay dividends of 8 cents, or 0.32% , as the stock had stopped growing. It started to buy back stock aggressively, and has done so every year.  Since then, Microsoft has spent $95.2 billion doing this.  So, this is the only way Microsoft has stopped the stock from plummeting, and it is actually one of the biggest stock buybacks in history, given the Microsoft market capitalization of 207.11  billion today.

Since the beginning of 2000, Microsoft’s stock has significantly lagged the overall stock market, underperforming the S&P 500 index by 58%. Over the past 13 years, the company’s valuation multiples have compressed severely: the Enterprise Value/Sales ratio plummeted from 24.3x to 2.4x, while the P/E ratio dropped from 62x to 1.0x. Microsoft’s current valuation is the lowest in its history.

Some of the latest initiatives from Microsoft, such as the Bing/Yahoo alliance or the Microsoft/Nokia partnership have not taken off. In tablets and mobile, Microsoft got completely crushed by Android and Apple.  Blurry plans and promises have not convinced anyone–probably not even Steve Ballmer.

In spite of this bad chain of events, Microsoft is far from dead.  It has a successful line of videogames and consoles, and is still the dominant player in operative systems and office suites around the world, (especially in the corporate world). There is no doubt that Microsoft will be the leading company in the cloud revolution with Microsoft Azure/Office 365.  Sooner or later, every company will have to migrate to these platforms because no company using Microsoft products today will have the luxury to switch to a different system, incurring infrastructure challenges and employee learning curves.  Companies around the world have delayed the transition mainly for two reasons:

  1. A hostile and adverse macroeconomic environment; and
  2. They have been able to operate with what they currently have.

Some companies are still using Windows XP and have never embraced Windows Vista or Windows 7; but the reality is that at some point Microsoft Office and other corporate applications won’t run on these platforms anymore.  The day when all the companies around the world will have to finally move to newer platforms is getting closer and closer. In my opinion, the tipping point will be the release of Windows 8 by next year.  This is a completely new operating system, and has nothing to do with the Windows Vista fiasco or the Windows 7 that nobody wanted to see.  The new Windows 8 will probably be fast and well integrated with Office 365. It will probably be optimized for the cloud, and its release is going to be a game changer for Microsoft. Cloud computing will be the start of a new computing era, and Microsoft will be the main player.  You can take a look at the new Windows 8 interface here http://goo.gl/1wTsG and see for yourself why things can be different now.

The truth is that the cash cow for Microsoft is Windows and Microsoft Office, and they have not done too much in that area over the past 10 years (about the same amount of time that Microsoft shares have been stuck). If that changes with the release of Microsoft 8 and cloud revolution, sales will soar again and innovation and greatness will come back to Microsoft. At the current valuation levels, Microsoft is a great buying opportunity. Forget about patience–investors that have waited for this moment over the past 10 years can get on the train at the last minute and enjoy the ride. I believe that the Microsoft story is about to change pretty soon.  Even if they fail in search and mobile (which so far seems to be the case), corporate sales can finally boost the stock to new levels. Don’t forget that cloud computing work is on a subscription basis, so once the companies upgrade their systems, they will be locked into Microsoft products, services and upgrades for a very long time. It will also provide Microsoft with a steady income from corporations that they don’t have today.

Microsoft valuation is ridiculously cheap right now.  In a worst case scenario, you know that Microsoft won’t allow the stock to plummet further by paying dividends and buying back stock. If things never turn around, at least you know that in 10 years you will be able to sell your stock at $24.72–that’s for sure.

One last tip… please don’t buy the stock when it  is at $26 or $30. It always comes back to $24 (it has done that over the past 7 years). Buy it at that level and see it grow starting in 2012.

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