Will Microsoft Outperform in 2011?

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Each year, we take a look back in order to look ahead. We do this by industry, by trend, and ultimately by stock. Here's a closer look at Microsoft (Nasdaq: MSFT  ) , Fool style.

Foolish facts



CAPS rating (out of 5) ***
Total ratings 14,512
Percent bulls 86.7%
Percent bears 13.3%
Bullish pitches 2,457 out of 2,997
Highest-rated peers Radiant Systems, Oracle (Nasdaq: ORCL  ) , MICROS Systems

Data current as of Dec. 28.

Few stocks generate a bigger divide than Microsoft. Most Fools either love Mr. Softy's valuation, or hate its market position. But don't take my word for it. Here are two dueling CAPS pitches, from two of my favorite Fools.

"OK, I'm sold. T2 Partners' recent excellent presentation on Microsoft bas cause me to see how this company can easily beat the S&P 500 over the next several years ... We have a company that's currently trading at around 12 times its trailing earnings. Using T2's assumption of $2.40/share in earnings for 2011 and assigning the current multiple to that we arrive at a price per share of $33, an [18%] increase from today's price ... not including the dividend," wrote TMFDeej in July.

"I have great admiration for the achievement that was Microsoft in the Bill Gates era. It was in its time a tremendous Rule Breaker, and a model example of a company that really understood how to build a business model based on customer convenience. This was the golden age of Microsoft. The problem is, that was a couple decades ago. The world has changed, and not in a way that favors Microsoft either in the present or, I think, the future," wrote TMFSpiffyPop, aka Fool co-founder David Gardner, in September.

Looking back to look forward
In many ways, the year's big Microsoft stories at reflect these divergent views. Fools can't agree on whether Mr. Softy is poised to grow or wilt:

Looking at Microsoft's financial performance, I can understand why the bulls are buying:


Q2 2010

Q3 2010

Q4 2010

Q1 2011

Revenue growth 14.4% 6.3% 22.4% 25.3%
Normalized net income growth 64.9% 11.2% 31.3% 53.3%
Gross margin 80.9% 81.0% 80.2% 80.6%
Return on capital 44.0% 26.3% 29.0% 32.4%

Source: Capital IQ, a division of Standard & Poor's.

And here's what analysts expect from Microsoft over the next two years, according to data compiled by Capital IQ:




Revenue estimate $68,151 million $73,240 million
Normalized profit per share estimate $2.43 $2.68

Source: Capital IQ, a division of Standard & Poor's. Data current as of Dec. 28.

Foolish outlook: bullish
Far as I can tell, Microsoft's best days are behind it. But that doesn't mean that those Fools who see value in Mr. Softy are wrong. This stock could very easily be a short-term market beater. I've rated it as such in my CAPS portfolio.

Now it's your turn to weigh in. What do you think of Microsoft's prospects at current prices? Leave a comment in the box below to explain your thinking. You can also join me in rating Microsoft in Motley Fool CAPS.

What will be next year's best stock? The Motley Fool has created a brand new free report called "The Motley Fool's Top Stock for 2011." In it, we reveal the little company set to profit from the broadband Internet expansion. Get instant access by clicking here – it's free.

Interested in more info on the stocks mentioned in this story? Add Microsoft, Oracle, Netflix, Apple, Adobe Systems, Google, or Yahoo! to your watchlist.

Google and Microsoft are Motley Fool Inside Value picks. Google is also a Motley Fool Rule Breakers recommendation. Adobe Systems, Apple, and Netflix are Motley Fool Stock Advisor selections. Motley Fool Options has recommended subscribers open a diagonal call positions in Adobe and Microsoft. Try any of our Foolish newsletter services free for 30 days.

Fool contributor Tim Beyers is a member of the Rule Breakers stock-picking team. He had stock and options positions in Apple and stock positions in Google and Oracle at the time of publication. Check out Tim's portfolio holdings and Foolish writings, or connect with him on Twitter as @milehighfool. You can also get his insights delivered directly to your RSS reader. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool owns shares of Apple, Google, Microsoft, and Oracle and is also on Twitter as @TheMotleyFool. When it comes to stocks, the Fool's disclosure policy is a lookie-loo.

Read/Post Comments (2) | Recommend This Article (11)

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 December 29, 2010, at 6:07 PM, daveshouston wrote:

    Microsoft's only noteworthy innovation is 'Bloatware.' They invented the category and populated it.

    Q. What business is Microsoft really in??

    A. If you answered 'Software' you were not quire right. Microsoft's real business is selling upgrades to old products. Their business model depends on the inertia of old product lines. They benefit greatly from corporate IT Department resistance to change (the main characteristic of corporate IT departments).

    A really good company, like Apple, can point to 'yesterday's breadwinners,' 'today's breadwinners,' and 'tomorrow's breadwinners.'

    With Microsoft it's all about yesterday.

  • Report this Comment On December 29, 2010, at 8:14 PM, techy46 wrote:

    Apple's growing a market created by Nokia and Sony. Microsoft grew a market created by IBM; remember it was the IBM PC. Can Microsoft grow a market created by Apple? Using 13x for MS it's $32/s for 2011 and $35/s for 2012 with 10x the shares of Apple. So Apple's $320/10 = $32 now. and maybe $350 by end of 2011 if they can stay ahead. Touchscreen UI and thin packaging arn't really hitech. Auto and home multimedia networks (XBox) with mobile devices (Atoms) is the future. Time will tell; oinly the parinoid survive, MS spent last tens years becoming a superior enterprise software provider, can they do it for autos and homes is the question. I say yes.

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