Last November, fellow Fool Michael Olsen made software and technology titan Microsoft
My thesis for my bullish stance on Microsoft is as follows: The company is a market leader and has an extremely profitable software business, which allows it to generate prodigious amounts of free cash flow. It then uses that free cash flow to benefit shareholders and develop future growth avenues as the core business matures.
Sure, the primary Windows operating system and Office software businesses aren't growing nearly as rapidly as they used to, but the collective client and business divisions generated an astounding 72% operating margin for fiscal 2006. These businesses make up nearly 63% of total sales and account for all of Microsoft's cash-flow generation as it invests in other divisions to diversify its business. You'll be hard pressed to find a more dominant franchise out there.
Critics argue that competitors are eating away at Microsoft's software clout. This is true to an extent. Firms such as Google
What's more, the latest operating system, Windows Vista, was recently released. At best, the system will inject a needed boost to sales and cash flow growth, and at worst, it will serve to solidify Microsoft's existing Windows and Office franchise. In either scenario, management will continue to buy back stock, increase the dividend, and put money in the bank, adding to the billions in cash already on hand.
At some point in the future, Microsoft's operating system and software dominance will probably fade. As such, it has been working to develop a number of new revenue streams, including its MSN online network, Xbox gaming devices, and Zune portable music players. And while none is currently profitable, they have become solid alternatives to leading firms such as Google and Yahoo!
Add it all up, and you have one of the most diversified ways to combine exposure to burgeoning technology platforms with a cash-cow business that has at least a fight or two left in it.
The shares aren't as much of a steal at the low $20s they reached last fall, but as long as Microsoft can continue growing in the double digits for another decade, it could be worth somewhere between $30 and $35, just as Olsen surmised last November. Based on current levels, that's no home-run return, but it is a respectable single or double, and that sure beats a strikeout.
- Read the bear argument
- Read the bullish rebuttal
- Read the bearish rebuttal
- Sound off in Motley Fool CAPS
- Vote for the winner
Yahoo! is a Stock Advisor pick. Get 30 days of free access to the entire portfolio, which is beating the market by more than 42%. Microsoft is an Inside Value pick. To see what other great stocks have been recommended to subscribers of the market-beating newsletter service, take a free 30-day trial today.
Fool contributor Ryan Fuhrmann is long shares of Microsoft but has no financial interest in any other company mentioned. Feel free to email him with feedback or to discuss any companies mentioned further. The Fool has an ironclad disclosure policy.