Microsoft Pooped Out a Poor Quarter

Stock (Symbol)

Microsoft (MSFT)

Stock Price

$51

Sector

Technology

Data is as of

May 19, 2016

Expected to Report

Jul 19

Company Description

Microsoft Corporation is engaged in developing, licensing and supporting a range of software products and services. The Company also designs and sells hardware, and delivers online advertising to the customers. The Company operates in five segments: Devices and Consumer (D&C) Licensing, D&C Hardware, D&C Other, Commercial Licensing, and Commercial Other. The Company’s products include operating systems for computing devices, servers, phones, and other intelligent devices; server applications for distributed computing environments; productivity applications; business solution applications; desktop and server management tools; software development tools; video games; and online advertising. It also offers cloud-based solutions that provide customers with software, services and content over the Internet by way of shared computing resources located in centralized data centers. It provides consulting and product and solution support services. Source: Thomson Financial

Sharek’s Take

Just after I felt Microsoft (MSFT) was a changed company, the company pooped out a poor qtr and now is back to growing stagnantly. Last qtr the Estimates were for MSFT to put up at least 7% then 13% profit growth the next couple of qtrs. The company had been beating the street by a good margin and it was conceivable that teens profit growth could be coming. But instead MSFT missed profit estimates, put out 2% profit growth, and analysts lowered qtrly estimates to -3%, 3% and 0% the next 3 qtrs. Also, the stock is selling for 18x earnings, which is fairly high for meh profit growth. Still, there’s a lot to like here. Office 365 is on a subscription basis now, and that’s where the money is. Microsoft’s cloud component Azure is also doing well as is the Surface tablet. Microsoft is one of only two stocks to hold Standard & Poor’s AAA credit rating, and the company uses conservative accounting principles — MSFT doesn’t exclude compensations costs from equity that they deliver to employees from its EBITDA. Analysts just lowered the company’s estimated long-term growth rate from 10% to 8%, but if the company does grow 8% that could mean an 11% total return once you include the 3% yield. But it’s disappointing the company pooped out this bad qtr as I felt good growth was coming.

One Year Chart

MSFT was doing good until these latest results. Last qtr profits rose 2% on a 2% increase in sales. Now the qtrly profit growth picture looks kinda sad. And the stock isn’t even on sale at 18x earnings. Meh.

Fair Value

MSFT has a June 30th fiscal year end. With that less than a qtr away I’m already looking ahead to 2017. My Fair Value is 18x earnings, which is a $52 Fair Value. Keep in mind that’s over the next 12 months. With the stock at $51 that’s not much upside. MSFT really need to get back on track, beat the street and up estimates.

Bottom Line

Microsoft has good products with its Office 365, Surface, and Azure. I feel good about future growth opportunity, but am disappointed in these lackluster results. Still, this is a safe stock with a nice yield and has delivered around a 10% total annual return the past decade. Microsoft ranks 28th of 35 stocks in the Conservative Stock Portfolio Power Rankings.