Microsoft Corporation (MSFT): Worth a Ticket – but Don’t Expect an Easy Ride

Rapid dividend increase

Moreover, Microsoft pays a dividend that has grown rapidly since it was first started. The rapid dividend increase over the last few years has given shareholders something to cheer about amidst the lackluster stock performance.

MSFT Dividend data by YCharts

Search engine letdown

But Microsoft’s search engine market share hasn’t improved. Bing currently stands at less than 5% of the global market share, whereas Google Inc (NASDAQ:GOOG)’s more than 80% market share still makes the latter a leader by a wide margin. Microsoft wants to dominate in search, but so far has remained unsuccessful. For this, Microsoft partnered with Yahoo! Inc. (NASDAQ:YHOO) to replace its search and ads engines under a 10-year deal in order to improve its Bing search platform.

OS and Office Threat

Google’s free Chrome operating system being incorporated in inexpensive laptops is an emerging threat. This could put serious pressure on Microsoft’s operating system revenues. Moreover, Google docs is another threat for Microsoft’s Office. Considering that these segments are Microsoft’s real operating income strengths, any market share losses to similar Google’s products would put a dent in the former’s fundamentals.

Foolish Bottom-line

Despite all the challenges, it is my view that the risk to Microsoft’s fundamentals are overwhelmingly skewed to the upside, which presents a very clear and intriguing investment opportunity on the long side. I’m comfortable with a long-term revenue growth outlook of 8% on Microsoft, along with a steady improvement in cash flow generation.

All told, I think Microsoft can grow its cash flow at a 7%-9% rate for the long term — discounting that back, it suggests a fair value of about $41, making it one of, if not the, cheapest mega-cap stocks in the market today. Even with a two-point premium in the discount rate to other established tech companies like Cisco Systems, Inc. (NASDAQ:CSCO) and Oracle Corporation (NASDAQ:ORCL), Microsoft looks meaningfully undervalued today.

Unfortunately, investors are so troubled by the fears of competitors eating into Microsoft’s market share that it is hard to see how sentiment will let this stock work in the near term. I think patient investors who believe rational heads will prevail could well be rewarded in the years to come, but don’t expect an easy ride.

The article Worth a Ticket – but Don’t Expect an Easy Ride originally appeared on Fool.com and is written by By Nauman Aly.

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