Throw This Stock Away: Microsoft

I'm a diplomat at heart. Really. I don't like to make enemies.

So every week, even as I rip into a single stock and take it down a few pegs in this column, I always come right back and suggest three other stocks that I think will beat the market. It's a fair trade, I hope.

Who gets tossed out this week? Come on down, Microsoft (Nasdaq: MSFT  ) .

Hard times for Mr. Softy
There still seems to be a lot of love for Microsoft out there, despite -- or possibly because of -- its historically low stock price. In my "I Can Make You Rich in 3 Years" commentary yesterday, I suggested that investors seek out stocks that will be more relevant in three years than they are today.

To illustrate the opposing view, I figured Microsoft would be a safe bet.

"Can you honestly explain to me how the world's leading software company will be as relevant in 2012 as it is in 2009?" I asked. "Sure, there will be a wider audience of computer users in three years, but they aren't as likely to rely on Microsoft. Between open-source operating systems, free cloud-computing knockoffs of Microsoft Office, and a growing number of Web browsers, Microsoft will only continue to relinquish market share in many of its high-margin businesses."

I rubbed a few of you the wrong way with that assumption. Here are a few of your choice complaints:

  • "Are you trying to tell us that [Microsoft] will be stuck in the gutter where it is now for the next 3 years? I think not. Even if it only reclaims half of its earlier share price, which is not that hard to imagine, a person can still make nearly a 50% capital gain!"
  • "Microsoft is a cash cow. They'll just buy out their competitors."
  • "I expect they will continue to grow earnings faster than the overall market. Nobody cares about Linux."

I graciously accept all feedback, even when it makes my diplomatic heart skip a beat. I respect anyone who takes the time and effort to let me know they disagree with me. By all means, keep it coming. However, I'm sticking to my guns this time.

The assumption here is that little has changed at Microsoft. Over the past few weeks:

The economy is in a funk, but this doesn't mean that Microsoft isn't going to be the same bellwether it was before the downturn. After arguably unwarranted knocks on Vista, do you really think the public will embrace Windows 7? Computers continue to get cheaper, and less powerful in the case of netbooks, so why won't Microsoft's operating systems and productivity suites be marked down in the future?

A lower market share at shrinking price points is not going to keep this "cash cow" grazing on blades of greenery the way it used to. Even online, where Microsoft is somehow losing gobs of money at MSN, it blew the opportunity to turn that around by snapping up Yahoo! (Nasdaq: YHOO  ) . Yes, Yahoo! wanted too much money for its company last year, but apparently so did Microsoft shareholders.

Good news
As is the case every week, I don't talk down a stock unless I have three alternatives that I believe will outperform the company getting tossed. Let's go over three new fill-ins.

  • Google (Nasdaq: GOOG  ) . Analysts see Microsoft's earnings continuing to fall through the remainder of the fiscal year, before bouncing back in fiscal 2010. In short, Wall Street sees profits growing by a mere 4% from fiscal 2008 through fiscal 2010. Google, on the other hand, is expected to grow its earnings per share by 15% over the next year alone. Microsoft may be fetching a more attractive earnings multiple based on 2010's target (8 for Microsoft vs. 13 for Google), but I am not confident with Microsoft's prognosticators. Microsoft has missed Wall Street guesstimates in three of the past four quarters. In the meantime, Google continues to gain search-engine market share at Microsoft's expense, and its Google Docs offers a free Web-based alternative to Microsoft Office.
  • Salesforce.com (NYSE: CRM  ) . Sticking to the cloud computing theme, when corporate spending does bounce back, it will do so prudently. Salesforce has been bucking the malaise, growing nicely as it wins converts to its Web-based enterprise apps. It has 55,400 corporate accounts, and counting. Microsoft isn't as heavy in enterprise software as, say, Oracle (Nasdaq: ORCL  ) , but when you're the world's leading software company, how can you not be threatened by a company whose toll-free number is 1-800-NO-SOFTWARE? The beauty of Salesforce is that its programs can run on most computers with Web access. Companies no longer need to upgrade to the latest operating systems or upgrade to more powerful hardware. The cloud computing revolution is going to deal a major dent in the traditional upgrade cycles that Microsoft has been feasting on for years. Salesforce isn't cheap, but analysts see the company's earnings soaring over the next two years.
  • Apple (Nasdaq: AAPL  ) . There are plenty of companies nibbling away at Microsoft's market share. Between Nintendo (OTC BB: NTDOY.PK) ruling the console wars and Firefox gaining in the browser battle, Microsoft is being threatened from all over. I see Apple's challenge as the fiercest, because Macs continue to grow faster than the Windows-powered computers that make it all possible. Yes, Apple computers can run Windows, and Microsoft's Office is a popular Apple program. However, all that will become less relevant as the Web plays a larger part of the computing experience. I won't even mention how Apple's iPod has humiliated Microsoft's Zune.

Value investors are drawn to Microsoft based on what the company has done in the past, but I'm not so sure that they are weighing the company's future. Yes, its stock is trading for roughly half of last year's high, but the same can be said of Google, Salesforce.com, and Apple.

The deals are everywhere. Investors simply need to find the bargains that will bounce back.

Other headlines out of the weekly Dumpster:

Microsoft is a Motley Fool Inside Value pick. Google and Salesforce.com are Motley Fool Rule Breakers selections. Nintendo and Apple are Motley Fool Stock Advisor recommendations. Try any of our Foolish newsletters today, free for 30 days.

Longtime Fool contributor Rick Munarriz isn't sure if Mr. Softy likes to play hardball, but he hopes he's wrong and that Microsoft does thrive in the future. He does not own shares in any of the stocks in this story. Rick is also part of the Rule Breakers newsletter research team, seeking out tomorrow's ultimate growth stocks a day early. The Fool has a disclosure policy.


Read/Post Comments (11) | Recommend This Article (12)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On March 04, 2009, at 4:59 PM, ByrneShill wrote:

    You obviously understand nothing at microsoft.

    -A bunch of rev and earning come from the buisness group (sql, servers, etc...). Do you really think that "cloud computing" is magical? It isn't. Oracle and SUN are competitor.

    -How do you think one access those supposed "cloud computers"? They use their own PCs, which, btw, needs operating systems to run.

    -You don't seem to understand how those supposedly web-based word-processor work either. You seem to think they run on one of google's remote server somewhere in aother dimension. They don't. They run on your PC (or Mac, or colecovision, whatever). The remote server merely sends you an executable code (wheter it's a java applet, a script embeded in a web page or a full blown compiled executable is irrelevant) that you run on your own PC, and your PC sends the file back to the server each time you save. Running said code requires an operating system.

    -On a side note about those apps: No serious company, government, or organization will rely on a remote server like google's to hold their confidential datas. That's even if you forget the fact that they're... how could I say it... let's just say not AAA quality to be polite.

    -Google isn't even a competitor. Worst case for msn is that google gets 100% of the market share, and MS turns of msn. How much earning would that take away? It would be accretive for Pete's sake. Google is an advertisement firm, not a tech firm.

    -MS browser is free. Market shares in browsers are more or less bragging rights.

    -Talk all you want about Linux, the average user doesn't want to have to recompile its kernel whenever he plugs in a new usb printer. I know it got better the last few years

    -MS's revs are up 2% during a period in which the GDP shrinked 6%. Is that so bad considering everything they sell is discretionnary spending for consumers and companies have scaled back on tech upgrades (or just gone out of buisness)? I don't see any competitor/peers doing that much better.

  • Report this Comment On March 04, 2009, at 5:03 PM, InLikeFlynn wrote:

    I think there is a strong case that Windows 7 will be a hit. Many users have put off upgrading to Vista and 7 is getting very good reviews. With many users 'stuck' on good old XP longer than expected they could be ready to jump in quickly on 7. Lower hardware requirements will also help.

  • Report this Comment On March 04, 2009, at 5:04 PM, Milligram46 wrote:

    The Fool is recommending dumping MSFT??? Time to buy buy buy!!!

  • Report this Comment On March 04, 2009, at 5:32 PM, TMFBreakerRick wrote:

    Byrne, but you said it yourself. All of the cloud computing functions require "an operating system" not the most expensive operating system.

    For the most part, cloud computing is OS-agnostic.

    And if you think companies and governments don't trust cloud computing, try telling that to the 55,000+ companies that trust Salesforce.com with their sensitive CRM data (or the many companies and universities turning to Google Mail and Google Docs).

    And you're comparing this country's GDP against Microsoft's GLOBAL revenue growth, which isn't apples-to-apples exactly.

    All the same, you know I always appreciate your feedback, even if we typically disagree.

  • Report this Comment On March 04, 2009, at 5:34 PM, papamaui wrote:

    In my opinion, we've living in stressful times. However, that said, I think we still have much to appreciate and enjoy ... our families, our friends, and our Macs and iPhones. Without a doubt, my 2 year old 24" iMac and OS X i(10.5.6) is the finest computer I've ever owned and my iPhone is an awesome handheld computer/cell phone. I can do nearly everything on it that I can on my iMac ... which makes travel time productive. I was already an AT&T customer when I bought my first iPhone ... the day after it was introduced. Since that time AT&T has upgraded their service in my state and I have no complaints!

    I think my enthusiasm has helped many of my friends to switch from PC to Mac ... and many have switched to iPhone now as well. and I have yet to hear one negative comment.

    That said, I think the article is much closer to hitting the mark than missing it! However, when it comes to investing in AAPL stock, I'm much more cautious. Like many people, I've lost 50% of my accumulated value ... and I don't want to loose another big chunk of it! So, in conclusion, I'm very positive about Apple ... very apprehensive about investing ...

  • Report this Comment On March 04, 2009, at 5:41 PM, TMFBreakerRick wrote:

    Milligram, just to clarify one thing. The Fool isn't recommending dumping MSFT, but A Fool is. The stock remains an active Inside Value pick, as noted in the disclaimer at the end. My opinion is my own.

    However, if you want to base my bearishness on MSFT as a contrarian indicator, keep in mind that Microsoft also was the subject of my weekly "Throw This Stock Away" column on June 30, 2008:

    http://www.fool.com/investing/value/2008/06/30/throw-this-st...

    The stock closed at $27,51 that day, and has gone on to shed 41% of its value since then.

  • Report this Comment On March 04, 2009, at 6:29 PM, Chazzzman wrote:

    Word on the 'geek' street is that Google hired away MS's best folks long ago, got fined, paid up, and moved on.

    When I work with folks at MS, they don't strike me as being the brightest bulb on the tree. There was a famous MS-internal website that displayed MS engineers' frustration with being unable to figure out how to make a tabbed browser, years after Firefox had done so.

    I've watched Google grow over the years, and they certainly seem to know what they're doing. I don't get that impression (at all) from Microsoft. Take away my Windows and I'll switch to Linux or a Mac. Take away my Google, (searchable) Gmail and Google Doc's and I'll be lost.

    Will MS be smaller in 2012? It seems like less of a player today than it was just a few years ago. I don't see any reason for that trend to change.

    When I started in this business, Novell Netware was the big -- and only -- network OS. Today, it's a footnote. Remember WordPerfect? How about Lotus 1-2-3? IBM? Compaq?

    Just because MS has cornered the market on the Operating System doesn't mean they'll be top dog forever. Those piles of low-priced 'student' versions of MS-Office sold over the counter tell me that ordinary users are unwilling to spend many hundreds of dollars for a word processor and spreadsheet package. Businesses do so because they think they have to do so to keep a consistent format with other companies -- eventually, they'll come to their senses. MS doesn't make their money on Windows; it's just a loss-leader for the business products.

  • Report this Comment On March 04, 2009, at 7:56 PM, Milligram46 wrote:

    <i>However, if you want to base my bearishness on MSFT as a contrarian indicator, keep in mind that Microsoft also was the subject of my weekly "Throw This Stock Away" column on June 30, 2008:

    http://www.fool.com/investing/value/2008/06/30/throw-this-st...

    The stock closed at $27,51 that day, and has gone on to shed 41% of its value since then. </i>

    Don't break your arm off patting yourself on the back on that one.

    Lets see, the S&P 500 closed at 1262.90 on June 30, 2008. Today it closed at 712.87. The S&P 500 is down 44% since you wrote that post, so Microsoft has OUTPERFORMED the S&P500. Consider this, of the Dow 30 stocks, only 12 of the 30 have given a return on investment in the last 10 years. Number 12 on that list is Microsoft, a paltry 5.9% - but only 11 blue chips have done better, and 18 are in negative territory (data as of last week).

    If I apply your same, ehem, logic, to AAPL, AAPL closed at $170.12 on June 30, 2008 and closed at $91.17 today. AAPL is off 47%!!! I was actually better off putting my money into MSFT than AAPL, given YOU put the line in the sand of 6/30/08, and AAPL has under performed the S&P 500 and MSFT since June 30, 2008. Numbers don't lie.

    OK, fine Milligram, think you're so smart, surely GOOG has done better! HA! Close on 6/30/08 - $537.00 (yes even). Close today, $318.92. GOOG is off -- 41%. Guess they are in good company, and outperformed the S&P 500 and AAPL, just like MSFT.

    I've been recommending CLX for a while now - back on June 30, 2008 they came in at $53.21. The close today, $47.51. Now I don't need to crunch numbers to see that CLX has smoked all of the stocks you say dump and buy.

    So please, in the middle of the worst bear market since 1932, don't point to a stock and say, "see it's down 41% I'm right," when the whole darn index is off 44% to begin with.

  • Report this Comment On March 04, 2009, at 8:50 PM, TMFBreakerRick wrote:

    Milligram46, fair point on the relative performance.

    Just know that if the market doubles over the next year and Microsoft were to rise by 99% that I won't be here saying "I told you so!" on the grounds that it was a relative victory.

  • Report this Comment On March 11, 2009, at 11:43 PM, zbd wrote:

    One should know something about technology and the companies that produce it before making such rash predictions.

    Competitively, Google is very one-dimensional compared to MS. They're advertisers with other interests. Microsoft is the underlying foundation of business computing. They have a few things that nobody else has, or can hope to touch soon, in the arena of enterprise computing. Active directory, Exchange server, SQL server, SharePoint are just a few of those. Combined with the platforms they run on, MS provides business with the tools to run an enterprise efficiently. Because the enterprise backbone is Windows-based, it's easier to manage Windows desktops than other platforms. Easier = cheaper. IT staff in big enterprise shops wish for better tools to manage and integrate Macs & Linux. They don't exist - not at anything near the price of managing a Windows environment. Open Source evangelists will tell you otherwise. The truth is, support and management of Linux and Mac in an enterprise is more expensive than Windows. Expertise in the other platforms is more expensive. Support is weaker. Day-to-day management is more difficult. I've been in the business for a long time. These are the facts as they stand today.

    Microsoft is only beginning to take an interest in advertising. I would remind you of Netscape's fate, once MS took an interest in the browser market.

    I'm not evangelizing MS over Linux or Mac. I'm stating facts that make their position in the market far more resilient than the one you've represented herein.

    The next big thing is supposed to be cloud computing. It will be slower to develop than you think. A lot of fluff claims are floating around out there. It will be some time before applications in the cloud are capable of satisfying the needs of a complex business environment, if they can do it at all. The only company I see that has the applications to drive progress in the cloud is Microsoft. Nobody else has Word, Excel, or PowerPoint to build on.

    People want to believe hype. The tech industry has a long and sordid history surrounding hype. Cloud computing is currently hype. Advertising is not.

    Speaking of advertising, the next wave of serious trouble is going to come from advertising, in the form of malware delivery systems. It's already happening, and it's going to get a lot worse before it gets better. Organized criminals are building infrastructures to use advertisements to redirect users to malware. They are, to date, very successful, and are becoming more brazen every day, as they are very difficult to track down. I see them as a threat to the advertising-based model of the Internet. I am not alone in this view. Nobody is having a lot of success dealing with the problem.

    Who is going to suffer more if the general public wakes up one day and realizes that they can't trust advertisements on the Internet (you don't know it, but this should already be your opinion)? Google, or Microsoft? Both would be badly hurt by it, but one of them would be unlikely to survive.

  • Report this Comment On November 17, 2009, at 8:47 PM, smithton wrote:

    MSFT is up approximately 82% since the publication of this article. Thank you, common sense, for prevailing over this article!

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