Stock (Symbol) |
Microsoft (MSFT) |
Stock Price |
$59 |
Sector |
| Technology |
Data is as of |
| November 7, 2016 |
Expected to Report |
| Jan 26 |
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 |
 Microsoft (MSFT) has successfully transformed itself from the old economy to the new. In the old economy, MSFT sold its Office products in a box or with a new computer. But after 1999 most everyone had upgraded their computers for Y2K, thus MSFT’s profit growth stalled. In the years following, MSFT would grow profits at a slower rate, as the P/E fell from a median of 67 in 1999 to 12 in 2012. So even though profits would grow, the stock was stuck between $20 and $30. Then from 2013 to 2015 profit growth stalled while MSFT moved into a subscription model and invented the Surface tablet. Today, the company has numerous brands producing revenue — many on a subscriptions model. Office 365 allows you to access your email from anywhere on the Internet, and Azure lets you store apps and data on MSFT servers (the cloud). The company has its hands in gaming revenue with its Xbox Live and consoles. Even Windows 10 is proving to be a success. LinkedIn (LNKD), one of the best brands or franchises in the world, is being acquired and is growing profits rapidly. Microsoft and Johnson & Johnson are the two safest companies in the world. Most publicly traded tech companies don’t account for employee options in the EPS calculations and MSFT does. The books are clean. MSFT has grown profits 15% and 13% the past 2 qtrs, has an estimated long-term growth rate of 10% per year and pays a 2% dividend yield. The stock sells for 20x earnings due to its high safety factor. This is a good way for conservative investors to gain technology exposure without taking on additional risk. |
One Year Chart |
 Last qtr MSFT delivered 6% sales growth and 13% profit growth, which blew past the 1% estimate. Wall St loved the news and sent the stock to an All-Time high. Still, Annual Profit Estimates didn’t increase much, so profit estimates for the next 4 qtrs are pretty much the same as they were last qtr. Estimates are: 0%, 15%, 3% and 1%. It seems to me like management is underpromising to overdeliver — and I do like that profits are growing in the teens again. |
Fair Value |
 It sucks that this stock doesn’t have more upside than it has. But when you’re a 10% grower selling for 20x earnings that’s what your Fair Value is. I mean a P/E of 20 is generous, and is given partially because the stock is safe and also because it pays a 2% yield. But long-term, stock growth usually follows profit growth and if you’re gonna grow profits 10% a year the stock might go up around that rate as well (over the long-term). |
Bottom Line |
 Microsoft stock has been trending up for more than three years as the company has successfully transitioned itself into the new economy. These subscription products like Office 365, Azure and Xbox Live provide a steady stream of income. MSFT has grown profits in the teens the last two qtrs which is a nice achievement, but with a P/E of 20 the stock doesn’t have much upside to my Fair Values. Still, this is a great stock for conservative investors to buy-and-hold with an estimated total return of 12% per year (hypothetically). Microsoft ranks 13th of 30 stocks in the Conservative Stock Portfolio Power Rankings. |
Power Rankings |
Growth Stock Portfolio
N/AAggressive Growth Portfolio N/AConservative Stock Portfolio 13 of 30 |
