It Just Seems Silly Not to Buy Microsoft

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There are those glorious days in life, when you walk into the supermarket to buy cereal, and at the checkout, the guy ringing you up says, "You know these are buy one, get two free?" Really? How is that possible? you think. Well, I guess I'd be a fool not to take advantage. Then you wander home, smiling at your good fortune.

Microsoft (NASDAQ: MSFT  ) feels like that right now.

After a disappointing earnings release, including an acknowledgment of weakness in Surface sales, the company's stock tanked, falling 12% over the next day. The company is now trading at a P/E of just 12, even though revenue, operating income, and earnings per share all increased over the previous year. If now isn't the time to buy Microsoft, I'm not sure there will ever be a time.

The state business
No one needs to kid himself into thinking that things are as they've always been. PC sales are dropping like greased watermelons, and the companies that support PCs are generally doing poorly. Intel (NASDAQ: INTC  ) is forecasting 2013 sales to be level with the previous year, and second-quarter income fell almost 30%, the company announced last week. The chipmaker isn't the only one suffering, as computer manufacturers and software companies have floundered as well.

Microsoft's own woes are, at least partially, tied to the PC's decline. The company said its Windows division saw a drop this past quarter, because of the changing landscape. For potential investors, the question is: Does that drop forecast major problems in the future?

Given the strength of the company's enterprise products and its massive market share in the corporate world, I think the slow shift of computers from PCs to "other" is simply a hurdle for Microsoft to overcome. The enterprise business recorded $22.4 billion in unearned revenue -- future revenue from recurring billing and multiyear contracts. That's a strong pipeline for the business to tap to build up its next-generation offerings.

The problem is that the business is currently not great at those sorts of investments. The considerable cash money that Microsoft has spent on development has resulted in lackluster improvements lately. Weak sales of the Surface cost the company $900 million in inventory adjustments last quarter, and Microsoft spent another $189 million on research and development in the quarter. While the cash is going in, it doesn't seem to be coming back out.

Change ahead
The fingers can fly all they like, but at some point, investors are going to push CEO Steve Ballmer enough that he breaks. Right now, Ballmer seems to be making a play for a big change at the organization. The org-chart shakeup earlier this month has some analysts seeing a make-or-break scenario right here. Either Ballmer's new lineup fixes some of the issues that Microsoft seems to have, or he bows out and gives the reins over to a new leader.

That's the same sentiment that has been festering in the investor community for a while. Recent moves by activist investors have put Microsoft on alert. In April, ValueAct Capital took out a $2 billion investment in the company, and now ValueAct is working to get a seat on the company's board. If the turnaround is slow in coming, you can bet there's going to be a push for a change at the top.

The summary
Give the size of Microsoft's business, the market share it holds in key areas, and the potential for investments to work out in its favor, the drop in the company's share price seems like an invitation to jump in. The hurdles the company has to overcome are clearable, and the business is solid enough that the risk-reward balance seems reasonable. However, I could have written that same sentence a year ago, or three years ago, and investors would be barely up on their original positions. The biggest danger now is that Ballmer fails and doesn't leave.

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