Microsoft (MSFT) has a new CEO, and here’s what he has to work with — I mean deal with. Revenue should grow around 8% this year with profits growing just a little bit year-over-year. The company pays a dividend of 3% and uses cash to buy back stock.
As I mentioned last quarter, MSFT has agreed to purchase substantially all Nokia’s Devices & Services business and this will likely be a drag on earnings. I think will be good for the cell phone and tablet business, but the company needs to have superior products to make a difference. This isn’t the 1990s where people are buying PCs where MSFT gets a chunk of each sale. Now you can get on the Internet from your phone, which could be powered by Apple of Google.
The real problem with this company is the stuff just isn’t getting better. Internet Explorer, Office, Windows — these should be easier to use, and mainstream products. Since hasn’t been much improvement over the years, thus people are using products from competitors.
One Year Chart
Profit growth was a paltry 3% last quarter, and is expected to be down 20% this quarter. The stock, which was selling for 9 times earnings at one point in 2012, is now selling for 14 times earnings. The Estimated Long Term Growth Rate is 7% and if you add in the 3% dividend this looks to be a 10% grower, which sounds about right.
What sucks is MSFT made $2.73 in 2012 and is expected to make $2.70 this year. No profit growth in two years, there’s nothing to get excited about here.
Fair Value
I feel MSFT is worth 12 times earnings. Like a lot of other conservative dividend payers, this stock jumped during the first half of 2013 and now has little upside.
Sharek’s Take
MSFT’s new CEO has a lot of work in front of him. He needs new versions of products that actually work better and are an improvements over the old ones. I’m still running on Windows XP and really don’t want to upgrade. Years ago I went from Office 2003 to 2007 and that got more complex instead of easier. This company needs to quit pissing away money on programmers that don’t make game-changing improvements.
View the Earnings Table here. View the Profit History here. View the Ten Year Chart here.
