Microsoft's Quickly Becoming an Underground Sensation

Microsoft  (NASDAQ: MSFT  )  hasn't landed on many investors' holiday wish lists. As the stock hovers near the same level it was at 10 years ago, it's easy to see why many Microsoft shareholders are considering throwing in the towel. Microsoft CEO Steve Ballmer was asked several performance-related questions at the recent shareholders' meeting, and rightfully so.

Year to date, Microsoft's stock is up all of 3.8%. Microsoft's minimal returns compared to the 45% jump in Apple  (NASDAQ: AAPL  )  shares, a 7% bump in value for the increasingly competitive Google  (NASDAQ: GOOGL  ) , and a nearly 5% year-to-date increase for IBM  (NYSE: IBM  )  shareholders make Microsoft's share price "rise" look shameful.

Got you right where I want you
The decline of worldwide PC sales, coupled with Microsoft waiting too long to join the mobile computing party, which Ballmer admitted to recently, are often cited to explain Microsoft's ho-hum stock performance. While Microsoft's worldwide share of the smartphone OS market improved in Q3, its 2.4% remains well behind Apple's iOS 13.9% and, of course, Android's 72.4%. But to a growing number of fans, myself included, the "problems" are what make Microsoft a perfect value play.

Nomura analysts reiterated the firm's buy rating on Microsoft, placing a $37 price target on the stock. And Nomura is hardly alone -- Longbow Research, RBC Capital, and Raymond James also chimed in on Microsoft, with target prices ranging from $33 to $36 a share. At its current $26.75, Microsoft has an upside of over 20%, based on the lowest estimate.

And analysts aren't alone in their assessment of Microsoft. Marketing firm Greenlight named Microsoft the company to keep an eye on in 2013. Then there's Jim Simons' Renaissance Technologies. Renaissance manages over $15 billion in assets and remains a significant player in the industry, even after Simons' retirement a couple years ago. According to its recent SEC filing, Microsoft is now the fund's top holding, making up 1.4% of its total value.

That's great, but so what?
Though not quite a consensus, the reasons for all the good tidings are pretty similar. Yes, Microsoft was slow to get on board mobile computing; that's an undisputed fact. But with the rollout of Windows 8, sales of the Nokia smartphone running its Windows OS looking good, and its own tablet hitting the shelves, insiders are expecting revenue growth of nearly 10% in 2013.

Also noted by the growing contingent of Microsoft fans is its forward P/E of 8 and 3.4% dividend yield, yet it continues to fly under the radar. With Apple's iPhone 5 and iPad Mini  alongside Google's Nexus phone and tablets getting all the press, Microsoft's gotten lost in the shuffle.

IBM maybe the old-timer of the group, but with its multiple cloud computing solutions, it shouldn't be discounted. A quick glance at IBM's recent Q3 is proof positive IBM is a serious cloud competitor. While revenue was relatively flat in most business units, IBM's cloud services have already generated more revenue than all of 2011. As for Microsoft, its OS and Surface tablet have been front and center lately, but its commitment to the exploding cloud market -- just as with IBM -- should pay big dividends going forward, too.

As you know, investing in any security based solely on analysts or industry insiders' recommendations is rarely a good idea. But in this instance, they've got it right (finally). Microsoft's mediocre stock performance and relative valuation translates to minimal downside risk. That, combined with multiple growth opportunities heading into 2013, and beyond, has a lot of industry insiders singing Microsoft's praises.

It's hard to imagine an undervalued $227 billion industry icon not showing up on investment radars, but that's been Microsoft's fate -- at least for now. For one of the best values the market has to offer, you'll find Microsoft, hiding in plain sight.

It's been a frustrating path for Microsoft investors. But with the release of its own tablet, along with the widely anticipated Windows 8 operating system, the company is looking to make a splash in this booming market. In this brand-new premium report on Microsoft, our analyst explains that while the opportunity is huge, the challenges are many. He's also providing regular updates as key events occur, so make sure to claim a copy of this report now by clicking here.


Read/Post Comments (4) | Recommend This Article (1)

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 November 30, 2012, at 6:30 PM, FreeRange1 wrote:

    Absurd "analysis". Win8 and Win8 RT, along with the disaster called Surface, are being universally panned. This company has nowhere to go but down.

  • Report this Comment On November 30, 2012, at 6:49 PM, timbrugger wrote:

    FreeRange1,

    Me being called 'absurd' I can understand, I've heard worse. But Win8 and Surface 'universally panned?' I think not, though it's certainly not hard to find Microsoft naysayers. Thing is, it's just as easy to find Windows 8 and Surface fanatics. The disparity in 'expert' opinions is almost unprecedented.

    I recognize Microsoft is the company people love to hate, its been that way for 2 decades, ever since it was trying to take over the world in the '90's, remember?

    I also realize that all the iFanatics and followers of the marketing machine that is Apple, will never be able to evaluate Microsoft in an impartial manner, those wounds run too deep. Thing is, more and more industry folks, not tethered to the emotional parts of the puzzle, recognize Microsoft for what it is - an undervalued, growth and income stock with tons of upside.

    Thanks for the post; love the point/counterpoint! Tim.

  • Report this Comment On November 30, 2012, at 8:46 PM, RandomMeaning wrote:

    Tim Brugger, it doesn't appear that Microsoft fanatics can evaluate Microsoft, let alone Apple, either. So, that all really matters very little.

    Rather, the concern should be that despite Microsoft's bragging about 40 million licenses sold (without mentioning that the vast majority of those are to PC manufacturers for pre-installs - in other words, not actual sales as of yet) PC sales during the launch of Windows 8 are down 21% year-over-year. So much for pent up demand.

    Also, of those computers being sold, only 58% are Windows 8 as opposed to the launch of Windows 7 where it was 80%+.

    As a personal observation, I read dozens of articles per day ranging from pro Microsoft to pro Apple as well as many financial sites such as this one which cover technology. Derision from the Apple webs is hardly surprising. What is surprising is the level of resistance, criticism, and even derision aimed at Windows 8 from the pro Microsoft sites. I've never seen anything like it before. They've always been very optimistic and supportive, even during Vista. Not this time. Longtime readers of these sites will be able to detect the change in tone and attitude.

    But, that's just a personal observation. Let's get back to facts. Recent reports make it clear that the Surface RT is not selling well. There are various reasons for this but the bottom line is that the Surface RT is Microsoft's flagship device and it is not meeting Microsoft's internal projections. In fact, they are cutting back on their orders from the manufacturer. Sounds like the Playbook all over again. Sure there are some very vocal and devout supporters but if they don't sell, it really doesn't matter how much they personally love it.

    The Surface RT is due to be replaced as the flagship device by the Intel version. But already there is sticker shock reverberating through the pro Microsoft sites. This should come as a surprise to no one since cheap hardware has been one of the foundations of the success of Windows and a rallying cry for Microsoft's supporters for over 20 years. Then the recent news that the battery life is only 4-5 hours. For a tablet. There is only one way for the Surface devices to sell well. Regardless of tech specs and merit, positive or negative, the price would have to drop by quite a lot or it just won't sell beyond the same niche that the older Windows tablets used to fill.

  • Report this Comment On December 01, 2012, at 9:49 PM, chinaman8 wrote:

    the Surface RT and Windows RT are disasters

    and the Surface Pro at $899-999 is overpriced at 2-3 times the cost of an iPad

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