Microsoft - Putting the Green in Redmond
Microsoft - Love 'em or hate 'em its been probably the most influential American company of the past 10 -15 years (my apologies to Google, GE, Wal-Mart and any of the other contenders). Yes, it's massive. Yes, it has pending litigation in the EU. Yes, its market cap is $275 billion. Bearing all this in mind, I still think it is a company poised for a 'rebound' (they're not really down, so I think that rebound is probably a misnomer, but my vocabulary is shall we say... lacking, currently).
So why is this you ask? Well, I'm glad you did.
Big Moola ahead: The slate of products to be released in 2006 includes: Microsoft Office, Vista, and (while not technically a release) another push of Xbox with many new supporting games. These all equate to massive new revenue streams that have been gradually declining in the last few years. Microsoft has already stated that Vista will have a promotion and marketing plan that will inundate us all. Vista will not be cheap, and they're building premium services to unlock features straight into the product, which should be an additional revenue stream that currently does not exist in XP. Previously, I would have to go and get a full new version of XP to get a better version, which is a big pain. Now, if I decide to upgrade, I just point and click, and enter give AMEX a little additional business.
The new version of Office will probably get enough IT departments sufficiently excited to the point where they can convince CTOs and CFOs to put out the capital expenditure. This should make for a nice little upward blip over the past few years' Office sales. Finally, starting this summer, Xbox will be able to keep up with demand which means no lost sales, but more importantly, users forking out $60/game for the next generation of games.
*Caveat: I put it at 50/50 that Vista slips to 2007, in which case most of the above still holds true, just spread out over a sligtime frameer timeframe.
EU litigation - Who cares?: Microsoft has faced much worse (think DOJ break-up) and even the worst case scenario fine is barely larger than a drop in the bucket.
It's time for a bump: Things Microsoft has: a healthy balance sheet; ridiculous amounts of cash evenbuy backstock buybacks and special dividends; a large cash reserve. Things Microsoft does not have: a stock price that's moving. The stock has been stagnant for a loooong time now. Too long. In the past 3 years, the price has pretty much hovered between 25 and 28 bucks a share, with a current price of that's almost smack dab in the middle (26.88). This leads me to believe that 1) the additional revenue from to-be-released products has not yet been valued into the stock, and 2) the price is low enough and attractive enough that it won't scare people off.
Google gets dirty: Google has been the white knight for a long time and they're about to start to lose some luster. You can already hear the rumblings from a variety of different areas... investors have pushed the stock down $100/share from its high (which was only a month ago, mind you)... leading-edge techies have started to really hammer them from issues ranging from privacy to partnerships with that 'bastard-child' AOL. Someone will be ripe to take what Google is starting to lose, and my bet is Microsoft. They're doing all the right things - Licensing video technologies patents, getting a bigger piece of the advertising pie by competing with Overture and AdSense, and investing in their search engine to pick up additional share (that search box in IE 7 will provide a lot of new searches).
So there you have it; the big evil company is about to receive some of the fruits of spending its big evil dollars to build new products and revenue streams and this will be reflected in the stock price.
So why is this you ask? Well, I'm glad you did.
Big Moola ahead: The slate of products to be released in 2006 includes: Microsoft Office, Vista, and (while not technically a release) another push of Xbox with many new supporting games. These all equate to massive new revenue streams that have been gradually declining in the last few years. Microsoft has already stated that Vista will have a promotion and marketing plan that will inundate us all. Vista will not be cheap, and they're building premium services to unlock features straight into the product, which should be an additional revenue stream that currently does not exist in XP. Previously, I would have to go and get a full new version of XP to get a better version, which is a big pain. Now, if I decide to upgrade, I just point and click, and enter give AMEX a little additional business.
The new version of Office will probably get enough IT departments sufficiently excited to the point where they can convince CTOs and CFOs to put out the capital expenditure. This should make for a nice little upward blip over the past few years' Office sales. Finally, starting this summer, Xbox will be able to keep up with demand which means no lost sales, but more importantly, users forking out $60/game for the next generation of games.
*Caveat: I put it at 50/50 that Vista slips to 2007, in which case most of the above still holds true, just spread out over a sligtime frameer timeframe.
EU litigation - Who cares?: Microsoft has faced much worse (think DOJ break-up) and even the worst case scenario fine is barely larger than a drop in the bucket.
It's time for a bump: Things Microsoft has: a healthy balance sheet; ridiculous amounts of cash evenbuy backstock buybacks and special dividends; a large cash reserve. Things Microsoft does not have: a stock price that's moving. The stock has been stagnant for a loooong time now. Too long. In the past 3 years, the price has pretty much hovered between 25 and 28 bucks a share, with a current price of that's almost smack dab in the middle (26.88). This leads me to believe that 1) the additional revenue from to-be-released products has not yet been valued into the stock, and 2) the price is low enough and attractive enough that it won't scare people off.
Google gets dirty: Google has been the white knight for a long time and they're about to start to lose some luster. You can already hear the rumblings from a variety of different areas... investors have pushed the stock down $100/share from its high (which was only a month ago, mind you)... leading-edge techies have started to really hammer them from issues ranging from privacy to partnerships with that 'bastard-child' AOL. Someone will be ripe to take what Google is starting to lose, and my bet is Microsoft. They're doing all the right things - Licensing video technologies patents, getting a bigger piece of the advertising pie by competing with Overture and AdSense, and investing in their search engine to pick up additional share (that search box in IE 7 will provide a lot of new searches).
So there you have it; the big evil company is about to receive some of the fruits of spending its big evil dollars to build new products and revenue streams and this will be reflected in the stock price.
posted by Tim O'Shaughnessy at 6:06 PM
1 Comments:
I disagree with your investment thesis. The reasons why you argue Microsoft's stock price will rise are, at best, incremental changes to its profitability as far as I can tell. Xbox is still losing money and will for the next couple of years, probably. Vista will probably result in increased IT department spending but unless it results in dramatically improved office productivity I'm skeptical that this increase will be particularly large.
Lastly, just because Google gets hammered right now doesn't mean that somebody is has to do well - the market usually doesn't work that way. Unless you told me that Google was no longer going to pursue a strategy of creating a web-based application suite I wouldn't expect its results to affect Microsoft's that greatly.
Ultimately, companies like Microsoft, GE, Cisco and Citigroup have (a) gotten so large that they are now hard to value by the market and investment analysts, and (b) have for the past couple of years probably been fairly priced. The result of this is that for each of these companies it will take a significant change to market expectations to move their stock prices meaningfully; small blips will just be swallowed up by their enormity.
Getting back to investing in Microsoft, I think that you have a limited upside simply because of their enormous market cap...how much bigger can they get, and how will they get there? However, the threat the Google or somebody else might pose to an internet-based application system, even if this is still 10 years down the road, presents a fair amount of risk to what has been a very well-insulated market for Microsoft historically. My recommendation would be to proceed with caution, especially over the long run. You may be able to get a 10-15% returns for a few years, if you're lucky, but be careful to watch for an serious erosion to Microsoft's market dominance.
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