Red Hat, Inc. (RHT), Microsoft Corporation (MSFT) Trying Desperately to Excite the Market

Microsoft Corporation (NASDAQ:MSFT) has seen a decline in its share value from around $31 to as low as $26. Some investors are positive that the value will increase soon and are seeing this as a golden opportunity to buy this blue chip stock. There are also prospects that the current CEO may be kicked out of office, and this may bring a wind of change. I believe this will benefit the company, since so much of the company’s discount is due to poor past execution. There really is little doubt, in my view, that Microsoft will find its forte with its current resources. If it can pay strong dividends and still maintain a healthy balance sheet, it has the capability of investing in the next “big thing.” Microsoft has $66 billion in cash, which, to put into perspective, is enough to acquire Netflix, Inc. (NASDAQ:NFLX) seven times. Remember, Microsoft was the same company that brought you Xbox, so it knows how to execute if given enough chances.

Microsoft earlier acquired Skype, which has millions of followers and generates billions in earnings. And Windows 8 is also doing better than what the market recognizes, since it has already sold some 60 million copies. Its sales have been affected by substitution of tablets. In my view, the weak sales of Surface were due to the heavy price tag of around $500 to $600 compared with others that cost as little as $159. But, now that Microsoft has learned from its mistakes, it can now focus on opportunities.

Conclusion

In my view, Microsoft is a much more attractive stock than Red Hat. While the former is undervalued, the latter is overvalued. Only in public stock markets could companies like Red Hat command a multiple many times that of Microsoft despite having much less cash resources to expand in a market with few barriers to entry. At only 8.7x forward earnings, Microsoft is simply a bargaining waiting to be jumped on by value investors. Certainly, few are short the stock–only 1.1% of the float is being shorted. Free cash flow is now yielding nearly 10% while volatility is just under that of the S&P 500. This sounds like a lot of value for little cash commitment.

The article 2 Tech Firms Trying Desperately to Excite the Market originally appeared on Fool.com and is written by David Gould.

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