Over the past few years, I watched bemusedly, as analyst after analyst upgraded ole Mister Softee. First the value guys loved it, then the dividend buyers, next the growth-at-a-reasonable-price (GARP) crew. It got added to lots of “conviction lists.” The company is cheap, they are a cash cow, it has a great dividend, they are a turnaround story, blah blah blah. The only guy I don’t recall hearing from was the analyst from Nostalgia Capital Management.
History informs us that leaders from prior bull markets do not lead in the next bull — and MSFT was a leader two bull markets ago. I doubt they will be pulling the Nasdaq Qs Train up the hill back towards 5100 anytime soon.
Investors should be aware of a few other things when it comes to companies like Maytag Microsoft. You may have memories of the company as a fast growing, fearsome monopoly competitor dominating the technology landscape during the 1980s and ’90s. First DOS, then Windows, Office, SQL, gaming, and the massive potential of the internet.
But that was then, and they are no longer that firm. The Anti-Trust case slowed them down just enough to allow competition to explode in techland. Enterprise has been built to the point where it is replacement cycles, not innovation driving their profits. Consumers are migrating from desktop to mobile to handheld — none of which plays into their strengths. Besides, their genius was the original contract which paid them regardless of whether their operating system was in the PC; not delighted consumers with magical new products.
During the past decade, MSFT has returned exactly zero to investors, including dividends. They are a bloated, bureaucracy run by bloated, bureaucrat. The paradigm has shifted repeatedly, and they have failed to make the turn. They missed literally every major new technology, every innovation, every great idea from search to social to handhelds to tablets over that period.
The Kinnect is certainly a hit, but it is not the sort of product that moves the needle for a $234 billion company. X Box is also a consumer winner, but the firm spent billions to grab the franchise from Sony — with far less ROI than such a massive investment would should ever warrant. Everything else from Online to Search to Social to MP3 players to even their well reviewed but 5 years too late cell phone — has been a bust. Their bread and butter franchises — Office, Windows and SQL — are under assault from completely new product categories to which they have no response.
If you want to trade Mister Softee, go right ahead. You covered call writers and swing traders, have your fun. But this is no Widows & Orphans stock, no Buy & Hold long term investment. At least, not any longer. Its Apple or Oracle or Google that threatens the franchise, but a million entrepreneurs moving the ball forward, taking us into the future. They are in the process of turning into Maytag, a boring producer of appliances, with a modest dividend and not a whole lot of growth ahead of them.
Steam engines, leather belts, copper wires, bloatware all had their day in the sun. It happens to nearly every company eventually, Apple, Facebook & Google included.
The thing is, it has already happened to Microsoft . . . No one seems to have bothered to tell them this yet.
> Microsoft (MSFT) 2000-2012
click for ginormous chart
Please use the comments to demonstrate your own ignorance, unfamiliarity with empirical data, ability to repeat discredited memes, and lack of respect for scientific knowledge. Also, be sure to create straw men and argue against things I have neither said nor even implied. Any irrelevancies you can mention will also be appreciated. Lastly, kindly forgo all civility in your discourse . . . you are, after all, anonymous.
If you are looking for a 5-7% yield with 30-50% protection, I recommend MSFT, INTC, AAPL. Buy the stock sell the covered call for the protection. It works like a charm and it will even hold up in crashes like 2008.
Microsoft, plays the tax game, funds foreign susidiaries to avoid paying high u.s. taxes but then the money is trapped over-seas and not available to pay u.s dividends, so is forced to buy companies instead such as skype. At least that’s how it comes across to me.
BR, not so sure about this. I just looked at where I stand with my MSFT investment. Curren price is 20% above my purchase price and I’m getting a 3% dividend. I agree that management could be doing a lot better but when I see the new APPL CEO being given an outrageous compensation package when he hasn’t yet proved he can keep things humming along, it gives me pause. I know that you always want to be provocative but the comparison to Maytag is incorrect (and I was a Maytag investor years ago but got out at the right time). MSFT is a traditional value investment and I think their franchises will hold up (corporate America is not going to embrace cloud computing in the near future and even if they do, MSFT is getting their products ready).
techy,
Even easier – sell out of the money puts on MSFT.
And if you look closely, since past couple of years they are returning almost 60% of profits to investors in terms of dividends and buy backs.
I never comment your any Blogs.. But BR I agree with Orange14 on this one. Also wanted to add a big fan your Blog and follow you twitter as well. Keep up the good work.
Techy brings a good idea to the discussion. A few clicks of the mouse or taps on the bar and one qualifies for cash. Perhaps with practically no risk.
But isn’t this what OWSers are are barking about to a large extent? Making money with a few clicks when the common folk work their ass off for their sheckles is a main beef. THE SYSTEM IS RIGGED!
We are reminded again that given the choice between easy money and earned money, most everyone (OWSers-included, truth be told), will gravitate towards the easy money.
BR- good assessment of MSFT, as the past decade validates.
they are probably ok as stable huge patent protected cashflow –only modestly shrinking but only probably–unless you know where tech is going next five years they have clearly shown over a decade they have no idea how to put that money to work they are a poster child for bad patent law and handing the holder decades long monopolies
Microsoft should operate their company as a liquidating Trust similar to BP Prudhoe Bay or perhaps the Tobacco companies. They have a mature product with little to no possibility for future growth(windows) and it can be argued they have not made good deployments of capital. They’d best serve shareholders by making minimal capital investments to maintain the product and return all cash to shareholders. Anything else they do means they will be constantly watering down future pretasx margins, and ROA,ROE measures..
make that..unless you know where tech and patent law is going the next five years…
Banco Bilbao switches to Google for mail, calendar. Someone is getting a chair thrown at them by Ballmer today.
http://www.bloomberg.com/news/2012-01-11/google-wins-biggest-enterprise-deal-as-spain-s-banco-bilbao-reduces-costs.html
Of the tech dinosaurs, the one that might be an actual turnaround story is CSCO. Take out the ~$40b in cash and it’s selling at a stupid PE or cash flow multiple. Cloud/mobile still needs network equipment, and there are growth catalysts like voice over IP, video, IPv6 etc. While Chambers did a good job scaling and acquiring in the dot-com years and dealing with the aftermath, he stumbled recently with terrible acquisitions and stock buybacks at much higher prices. And whether they can maintain historical gigantic margins and differentiate their ports from competitors’ in the long run is an open question.
"¢ Microsoft Says 4Q PC Shipments Likely Fell Short (Bloomberg) http://www.bloomberg.com/news/2012-01-11/microsoft-says-fourth-quarter-pc-shipments-may-have-fallen-short.html
Microsoft Corp. (MSFT), the world's largest software maker, said industrywide sales of personal computers will probably be lower than analysts projected in the fourth quarter because supply was hurt by flooding in Thailand.
Analysts have estimated that total PC shipments fell about 1 percent in the period, Tami Reller, chief financial officer of Microsoft's Windows unit, said at an investment conference yesterday. The actual number is probably lower, she said. Bill Koefoed, Microsoft's general manager of investor relations, echoed those remarks at a separate event.
I disagree,
Although the price didn’t move for the last yrs MSFT has been growing earnings and dividends @ 13-14% per year for the last 5 yrs, which is pretty impressive given its size.
The stock just needs a catalyst, they could use up cash or increase leverage (just look @ the rates at which they can finance) and do an aggressive stock buyback program
BR: Much of what you say regarding MSFT’s being behind the innovation curve vis-a-vis “hit” consumer products is valid, and goes a long way to explain why its PE ratio has declined to around 10, sometimes even down to 9.
However, in recent and foreseeable economic conditions there are other considerations. For instance …
1. Low debt/equity ratio of about 20% – 22% 2. Ample balance sheet liquidity 3. With a PE of 10, the investor’s share of EPS is a 10% return. Not too bad there. 4. Free cash flow annually exceeds 100%. Thus, the investor’s share of ROE based on FCF also exceeds 10%. 5. Corporate-level ROE exceeds 40%, while Return on Capital exceeds 34%. Ain’t many companies that reach those lofty levels. 6. Dividend payouts as % of FCF is in the 20%-22% range. Quite safe divvy there. 7. Gross margins consistently range 77%-80%. 8. Operating margins have grown over the past 6-7 years; now at about 38%. Not too shabby at all.
Note that the above financial performance data has been achieved consistently by MSFT over a sustained period of years.
While MSFT’s revenues are growing at around 7% per year and it may not now be viewed as a “growth” stock, given the continuance of its financial performance MSFT serves as a viable investment alternative under the current “muddle through” economic conditions and somewhat hazardous market conditions.
Those who base their views on MSFT’s poor equity market valuation over the past decade rely upon poor logic, because investments are FUTURE oriented. That is, we don’t make our money based on the past 10 years conditions; we intend to make it based on what happens in the future.
pedrocpaguy
Hasnt that all ben true for most of the past 5 if not 10 years?
BR,
They did not have a PE of around 10, five or ten years ago. In mid 2008, they had EPS of 1.87 against a share price of around the same as it is now.
This may qualify as a trade, but I like basing my trades on fundamentally good companies, but I also bought MS in the 24 range mid 2011 and its about to get called away in a week and a half for a decent size gain.
I agree with pedrocpaguy and will add. First, to answer your question: yes, that has been true for the past 5 yrs, but the P/E was not yet low enough to justify being a true value investment as opposed to a value trap. To add, what I think growth types like you are missing, is that this is NOT Kodak. All MSFT has to do is get one or two things right. What if they get 7% phone share or tablet share? What if they start actually getting paid for all the pirated software in China and India? What if inflation rears its head, MSFT can simply raise prices and let the nominal revenue fall right to the bottom line. What if Ballmer goes and a reinvigorated company decides to actually innovate? If any of these happen (aside from the inflation), the P/E goes from 9 to 15 on top of meaningful EPS growth and the stock is a 50-100% home run. All with little downside risk and getting paid to wait. Assymetrically favorable risk/reward is what true value investing is all about- not chasing the tech trend du jure.
I first started programming in MS Windows in 1988, v 2.03 when it was a GUI shell for DOS. Until 2000 I was exclusively a MS developer in C++. In 2000 I started doing some Java and then moved in C# primarily with some PHP. For almost a year now I have been completely out of MS, coding in PHP, running Linux and Ubuntu on the servers and desktop, Android on the phone.
The reason for the shift? Because I have started my own biz and it makes no sense, none, to do that on the MS stack. AWS, PHP, Git, Rails, etc, the open technology stack is more than robust enough to build a biz and the value can not be beat. Why does that matter when corps are still on the MS stack? Because todays startups will be tomorrows corps. More importantly, the young people (and unlike me, most of the startup is world is young) running startups today will become tomorrows managers even if the startup fails. In tech, a startup on your resume is worth more than 3 MBA’s. And they have no experience with or allegiance to MS.
MS has always been a dysfunctional company. They had great people who did heroic work to create mediocre products in a bad environment. They relied on the desktop monopoly (brilliantly created by an early generation of MS managers) for growth and revenue. They no longer get great people, the desktop monopoly is becoming more irrelevant every day and MS is still dysfunctional.
Have your fun, there is money to be made here but BR is right, MS is not a buy and hold. This is not IBM who has reinvented itself several times. They are much more like Kodak or Polaroid or Xerox. Tech companies that once ruled the market.
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