Microsoft Corporation (NASDAQ:MSFT) is one of the most well-known companies in the world. The company has been shaping the technology world for more than 20 years, and it continues to be a cash cow. While Microsoft is a giant company that reached maturity a while back, there is still a lot of room for it to grow and provide further value for investors.
Company shows resilience
2012 was another successful year for Microsoft Corporation (NASDAQ:MSFT). The company generated $73.7 billion in revenue, $31.6 billion in cash flow from operations, and it was able to return $10.7 billion to shareholders in the shape of dividends and buybacks. Despite the weakness of the PC sector, which negatively influenced the results of companies like Dell Inc. (NASDAQ:DELL) and Hewlett-Packard Company (NYSE:HPQ), Microsoft continued to show a lot of resilience. Hewlett Packard recently reported a revenue decline for the seventh quarter in a row, whereas Dell Inc. (NASDAQ:DELL)’s profit was down by as much as 79% in the last quarter. Dell and Hewlett-Packard Company (NYSE:HPQ) will have to work hard to increase revenues. We may see the two companies coming up with new products such as tablets and mobile phones, as well as software and service solutions. I own shares of HP and I believe in the management of the company, but I realize that the company will have to do a lot of work before things turn around for it. At the moment, the main catalyst for Dell Inc. (NASDAQ:DELL) is a possible takeover. Currently, Hewlett-Packard Company (NYSE:HPQ) trades for a forward P/E of 6 and Dell trades for a forward P/E of 10. Of these two companies, HP has a better value.
Diversifying products
Microsoft Corporation (NASDAQ:MSFT) continues to move from PCs to different mediums such as tablets, smartphones, and gaming systems. This type of diversification will help the company grow organically, and in a healthy manner in the future. In the last quarter, Microsoft was able to grow revenue and earnings by 8%, which is impressive, given that the global PC economy has been suffering. It is very important for Microsoft Corporation (NASDAQ:MSFT) to diversify its products and show resilience at a time when the PC industry faces huge uncertainties.
Change in business model
Microsoft Corporation (NASDAQ:MSFT) is changing a lot of things. For example, the company is moving toward licensing its software, rather than selling it and being done with it. In the old system, users would buy Microsoft’s products (for example Microsoft Office) at the store and use it forever. In the new system, the company will charge users indefinitely for every year they choose to renew their license. This will ensure that the company has recurring revenue for years to come.
Partnership with Nokia
Microsoft Corporation (NASDAQ:MSFT)’s partnership with Nokia Corporation (ADR) (NYSE:NOK) has been working nicely. Windows Phone continues to be the fastest-growing smartphone operating system, even though the low base rate is definitely playing a role in this. Windows Phone is expected to reach a double-digit market share by the end of 2014, which is a strong accomplishment in this extremely competitive environment. Apart from Nokia, the other Windows Phone producers didn’t make much progress. However, this could be because most phone producers’ main focus is on Android. Keep in mind that Nokia Corporation (ADR) (NYSE:NOK) sells four out of every five Windows Phone devices on the market, which means that the success of the Windows Phone project mostly depends on Nokia. Currently, Nokia trades for a price that is too close to its book value (around 1.1 times its book value), which makes the company very cheap. Investors currently treat Nokia Corporation (ADR) (NYSE:NOK) as if it’s already in the process of bankruptcy.
Moreover, Microsoft is investing a lot of money in cloud computing in order to make its ecosystem more attractive to users from both the business and consumer sides. If successful, this should result in a lot of upside potential for the company.
Current valuation
Currently, Microsoft Corporation (NASDAQ:MSFT) enjoys a P/E ratio of 12. However, this number is expected to fall to 10 by 2015. In fact, excluding cash, Microsoft is looking at a future P/E ratio of 8, which means there is still a lot of room for this stock to go up. While waiting for the stock to go up, investors are being paid dividends, which is good for patient investors with long-term horizons. Speaking of dividends, in the last ten years, Microsoft grew its dividends from $0.08 per share to $0.86 per share. Again, in the last ten years, there was never a year when Microsoft didn’t increase its dividend rate compared to the previous year. Given the low payout ratio, Microsoft could easily double its dividends at the current cash flow rates.
Microsoft’s price to book value of 3.7 is in line with the industry average, while the company’s price to sales ratio of 3.8 is slightly below the industry average of 3.9. Furthermore, the company’s price to cash flow ratio of 9.5 is below the industry average of 10.6. At this point, Microsoft’s valuation is at pretty healthy levels. Because Microsoft mainly deals with software and services, it has pretty high margins. Microsoft’s gross margin is 75.4% in the trailing twelve months, and the company’s operating margin is 27.5% in the same period. Even though this number is slightly below historical figures, it is still impressive.
Conclusion
I own shares of Microsoft Corporation (NASDAQ:MSFT) and I don’t plan on selling any time soon. The company will continue to reward patient investors for years to come. In 2000, Microsoft was a bad investment due to high valuation compared to the company’s earnings. However, in the last ten years the company became a very attractive investment, as its valuation was pulled to more reasonable levels. The next ten years of Microsoft should be brighter than the last ten years of the company.
The article Microsoft Is Still A Good Investment originally appeared on Fool.com and is written by Jacob Steinberg.
Jacob Steinberg owns shares of Microsoft, Nokia and Hewlett-Packard Company. The Motley Fool owns shares of Microsoft. Jacob is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.
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