The fortunes of companies in the technology sector can change fairly quickly. Companies that are hailed as the darling of the stock market are overnight turned into toxic waste no one wants to touch. This is the very reason some of the most epic ‘bubbles’ have come from this sector. A major weakness with technology company valuations is the unreliability of growth estimates. The exaggerated growth estimates increase the EPS estimates and reduce the value of forward P/E multiples, thus making an expensive stock look very cheap.
A very recent example is Apple Inc. (NASDAQ:AAPL)’s fall from grace. The biggest argument given by pro-Apple analysts was the low P/E ratio of the stock and upside based on unrealistic growth estimates. As the recent developments have revealed these estimates were overly optimistic, to say the least. Another technology giant has been on the bad side of these sell side estimates. The market is expecting only 10% growth from Microsoft Corporation (NASDAQ:MSFT), which I believe is very pessimistic in light of its dominant position in gaming consoles, the strength of WP8/Windows 8, and growing a enterprise segment. I believe the recent quarterly results are a precursor for great things ahead for Microsoft Corporation (NASDAQ:MSFT) investors, and this is the right time to take a long position.
Quarter Performance
In its recent quarterly report Microsoft Corporation (NASDAQ:MSFT) met analyst revenue estimates and beat EPS estimates. The Street was expecting revenues of $21.5 billion and EPS of $0.75. The software giant reported revenues of $21.5 billion and EPS of $0.77, slightly above consensus estimates. One of the primary reasons behind the solid quarter was the stellar performance by the enterprise segment and better performance by the Windows segment.
Enterprise
Like other aging technologies companies, Microsoft Corporation (NASDAQ:MSFT) might be becoming an enterprise play. I believe this trend was initially started by International Business Machines Corp. (NYSE:IBM) when it diversified itself into an enterprise segment after declining sales in its PC business. Companies like Intel, Cisco, HP, etc. are relying heavily on their enterprise businesses to compensate for the slowdown in growth from their consumer segments. A major weakness of the consumer segment has always been the lower margins due to easy market entry. These margins are much higher in the enterprise segment, but with increased competition major players might start witnessing squeezed margins. While the growth in enterprise is compensating for PC slowdown in the short run, the increased competition in the enterprise segment can be a major problem for Microsoft Corporation (NASDAQ:MSFT)’s value in the long term. IBM investors should also watch out for this increase in competition in the enterprise segment, because IBM is relying heavily on its enterprise sales. In the medium run IBM’s innovative initiatives such as the Smart Planet program give it a competitive edge over its competitors.
Segments
Windows 8 sales were better than expected and were reported at $5.05 billion, compared to the $5.02 billion analysts estimated. The quarter doesn’t fully account for the impact of Windows 8 sales and I believe the next quarter will also reflect improvement in Windows segment. The real surprise came from the office segment, which reported sales of $6.03 billion, compared to estimates of $5.36 billion, almost 13% higher than expected. The sever unit also beat estimates with $4.39 billion, while Xbox missed slightly with revenues of $3.7 billion.
Windows Phone
The focus is still on the success of the Windows Phone 8. It is still too soon to hail the product as a success or loss. According to the recent earnings release from Microsoft’s smartphone ally Nokia Corporation (ADR) (NYSE:NOK), the company reported WP8 boarded Lumia sales of 4.4 million. Although the number is very small compared to what investors expect from Apple or Samsung, it is an indication that WP8 has broken through. Investors should also understand that the low sales from WP8 are also due to the limited global availability of Lumia and sales figures that do not reflect full quarter results.
The article This Giant is Still a Strong Buy originally appeared on Fool.com and is written by Mohsin Saeed.
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