So, how about the online business? The tacit street consensus may be that, Bing included, nobody can ever reach Google’s search engine popularity. Well, I wouldn’t be so sure. ComScore Media Metrix shows Yahoo! is very close to reaching Google in terms of U.S. unique visitors.
As a matter of fact, Bing is actually showing some strong growth figures, not in terms of revenue, but in terms of traffic metrics. The latest data shows Bing’s market share actually hit a record high of 17.9% of desktop search queries, coming at the expense of Yahoo! Google’s 66.7% looks far away now, but the internet is a fast changing environment, and there is nothing theoretically impeding Bing from becoming a massively used engine in the future.
Undervalued!
Now, some thoughts on valuation. To estimate the real value of Microsoft, I run a discounted cash flow valuation using Old School Value financial spreadsheets. My assumptions are as follows: the 10 years past free cash flow median growth rate (7.8%) is used for the average growth rate of the next 10 years. Next, I assume a terminal growth rate of 3%. Considering the company remains financially strong, I assume a 12% discount rate. My result indicates that the fair value estimate for Microsoft is $50.39 per share, almost $20 above the current stock price. As a result, Microsoft is clearly undervalued: from a valuation perspective, the stock could increase 50% more in the near future.
Notice my results are consistent with Microsoft’s ability so far to generate a consistently high free cash flow. Although I am quite a Microsoft bull, the Street also believes Microsoft is undervalued: Morningstar has a fair price estimate of $35 per share, and FT.com mentions that 32 analysts offering 12 month price targets for Microsoft have a median target of $35 dollars as well, with a high estimate of $41 per share.
Also keep in mind that Microsoft’s current PE ratio is relatively low, suggesting a cheap market valuation: 12.19. For comparison, the Standard & Poor’s 500 average is 16.9, Google’s PE is 27.08 and Apple, 12.19.
Bottom line
With the second most popular smartphone operating system by 2017, better tablet sales as traditional Windows PC users shift to tablets and the still strong OS, Windows 8, in a new PC world, Microsoft’s future cash flow generation may not sound bombastic, but looks pretty safe to me. Add to this the effect that dividends and share buybacks can have to mitigate short term losses and a huge R&D spending budget ($10.4 billion for fiscal 2013) committed to innovation, and you may not get a company as “cool” as Google or Apple, but you certainly have a great investment.
The article Will Microsoft Become the IT King Again? originally appeared on Fool.com and is written by Adrian Campos.
Adrian Campos has no position in any stocks mentioned. The Motley Fool recommends Apple and Google. The Motley Fool owns shares of Apple, Google, and Microsoft. Adrian is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.
Copyright © 1995 – 2013 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.
