3 ms·

An insane valuation? At the start of January 2000, Microsoft's most recent earnings per share was $0.90. It's share price was about $58 dollars. This would have

by Spyro7 15y ago

An insane valuation? At the start of January 2000, Microsoft's most recent earnings per share was $0.90. It's share price was about $58 dollars. This would have given it a P/E ratio of about 64x. This was relatively tame by dot com standards. MSFT's current P/E ratio is about 10x. Just looking at that number right there, most people would conclude that MSFT was a great value play. In my personal opinion it is indeed a great value play - but not so long as Ballmer is still calling the shots. If market prices were solely set based on income then you would be right; the price would eventually rise regardless of whether Ballmer remained at the helm or not. However, market prices are more complex than this. They also incorporate expectations for the future. It is here where MSFT's current problem is. If you look at the components of MSFT's cash flow their major income sources are the Windows Operating System and the MS Office Suite. It is unbelievable that either revenue source will suddenly evaporate. The problem is that both of MSFT's core business functions are under pressure. This pressure is coming from the decreasing dominance of the PC as the digital platform of choice and the increasing prevalence of Internet-based solutions to problems that were previously solved by offline software packages. While MSFT is currently conducting expansions into a large array of industries, it is unlikely to dominate these industries to the same degree that it currently dominates the desktop sphere. In all of the industries where MSFT is trying to expand its footprint it faces vigorous competition from fairly formidable competitors. Even in its core industries, challenges are appearing on the horizon. Here's just a really quick summary: 1. Video Gaming - Nintendo, Sony, Apple? (Perhaps for "casual" gamers only, but I am not well versed enough to know how serious of a contender Apple is as of yet) 2. Tablets/Mobile - Google, Apple, HP 3. Search/Advertising - Google (Look, this is a big enough fish, I don't even need to name anything else) 4. Operating Systems - Google (ChromOS in the distant? future, Android everywhere, tablets eating market share), Apple (tablet popularity may erode Windows market share) 5. Server & Server Tools - ORCL, Linux, IBM, etc, etc, etc 6. Microsoft Office - Nothing serious yet, but GOOG is salivating at a chance to chip away at this Market prices incorporate expectations for future growth as well as performance relative to peers. In the near term Microsoft is making buckets and buckets of solid cash. In the medium term, there are threats on the horizon that are looming large. In the long term, there is a great deal of uncertainty and this uncertainty is not made any better by strange moves like acquiring Skype for $8.5 billion. I have heard some people say that acquiring Skype was a defensive move. Look, defensive moves like that are the last ditch strategy of someone that knows they are losing. There were a billion strategies that could have been taken that would have yielded a better strategic position. What Microsoft needs is a visionary leader that can turn its buckets of cash into something that can carve out a substantial, permanent, and secure foothold on one of the fronts that they are fighting. That sounds cliche, but it is what they really need right now. Microsoft is a fantastic company with an amazing amount of talent in it. I actually believe that it has some incredible earnings potential, but unlocking this potential will take bold, aggressive moves - not expensive defensive posturing. It is not my intention to bash Microsoft. I have a lot of respect for the company. However, something obviously needs to change in response to the new challenges that they are facing. The status quo is no longer good enough. Sources: Edgar online for the year 2000 10-Q filing, yahoo finance for price in 2000, http://www.betanews.com/joewilcox/article/Microsoft-Q3-2011-by-the-numbers-Record-1643B-Windows-revenue-declines/1304021955 http://www.betanews.com/joewilcox/article/Microsoft-Q3-2011-... for revenue break down. I apologize in advance for any formatting strangeness in this post. In my defense - I am new here, and it is 1:31 am.

wonnage 15y ago
64x being tame by dot com standards still doesn't make it cheap! As for the earnings argument, look at it this way - Apple and Microsoft both made about 18B after taxes in 2010. Difference is, Microsoft's been printing money for almost a decade. Google doesn't even come close. It's a fantastically profitable company. You can speculate about the future however you want, the fact remains that this company that until a year or two ago made more than Apple and Google combined is priced far below that combination.
- Spyro7 15y ago
  It is a fantastically profitable company. A fantastically profitable company with the P/E ratio and historical growth rates of a public utility. Why invest in Microsoft when you could invest in Exxon Mobile, Johnson & Johnson, The Coca-Cola Company, Novartis - all companies with better long term growth rates and beefy dividends. Look, I am not trying to be discouraging, but I find it grating how little progress Microsoft has been able to make despite its huge market advantages. Maybe the question is one of perspective. I tend to constantly think in terms of long-term investments. If you are investing because you intend to cash in on an upcoming bounce in the price (rather than holding on for the long term) then that is actually a sound strategy - I wish you luck in timing the bounce. It's the long-term perspective that I am mostly referring to. That is the reason for the speculating about the future. Disclaimer: I own none of the shares mentioned above - as a matter of fact I currently own no shares of anything.
  - wonnage 15y ago
    Microsoft's had better earnings growth than any of the companies you listed. In the past 5 years Novartis grows its revenue from 30B to 45, MSFT does it from 51 to 62. Keep in mind that it gets harder the bigger you are - if you're already sucking 51B from your customers, how the hell do you find another 11? The flaw with speculating about the future is that anything that's certain will be priced into the stock immediately. Any other "educated guesses" you make might as well go to a blackjack table. A lot of people think they're being prudent just because they're investing with a "long-term perspective". That doesn't get you anything in and of itself - I can buy a car and hold onto it forever but it'll never appreciate (well, until it becomes an antique). It's true that you shouldn't daytrade, that you should be willing to stomach holding something even if it loses value. But that just makes it more important that you understand why you've chosen to hold onto this stock for so long. And I don't think speculation about the future is a good basis for that decision. If you can point to something in the present (e.g, 18B in net income) there's a lot more assurance that you're actually getting something for your money.

by Spyro7 15y ago

wonnage 15y ago

64x being tame by dot com standards still doesn't make it cheap! As for the earnings argument, look at it this way - Apple and Microsoft both made about 18B after taxes in 2010. Difference is, Microsoft's been printing money for almost a decade. Google doesn't even come close. It's a fantastically profitable company. You can speculate about the future however you want, the fact remains that this company that until a year or two ago made more than Apple and Google combined is priced far below that combination.

Spyro7 15y ago
It is a fantastically profitable company. A fantastically profitable company with the P/E ratio and historical growth rates of a public utility. Why invest in Microsoft when you could invest in Exxon Mobile, Johnson & Johnson, The Coca-Cola Company, Novartis - all companies with better long term growth rates and beefy dividends. Look, I am not trying to be discouraging, but I find it grating how little progress Microsoft has been able to make despite its huge market advantages. Maybe the question is one of perspective. I tend to constantly think in terms of long-term investments. If you are investing because you intend to cash in on an upcoming bounce in the price (rather than holding on for the long term) then that is actually a sound strategy - I wish you luck in timing the bounce. It's the long-term perspective that I am mostly referring to. That is the reason for the speculating about the future. Disclaimer: I own none of the shares mentioned above - as a matter of fact I currently own no shares of anything.
- wonnage 15y ago
  Microsoft's had better earnings growth than any of the companies you listed. In the past 5 years Novartis grows its revenue from 30B to 45, MSFT does it from 51 to 62. Keep in mind that it gets harder the bigger you are - if you're already sucking 51B from your customers, how the hell do you find another 11? The flaw with speculating about the future is that anything that's certain will be priced into the stock immediately. Any other "educated guesses" you make might as well go to a blackjack table. A lot of people think they're being prudent just because they're investing with a "long-term perspective". That doesn't get you anything in and of itself - I can buy a car and hold onto it forever but it'll never appreciate (well, until it becomes an antique). It's true that you shouldn't daytrade, that you should be willing to stomach holding something even if it loses value. But that just makes it more important that you understand why you've chosen to hold onto this stock for so long. And I don't think speculation about the future is a good basis for that decision. If you can point to something in the present (e.g, 18B in net income) there's a lot more assurance that you're actually getting something for your money.