Dueling Fools: Microsoft Bull

Not only is technology titan Microsoft (Nasdaq: MSFT  ) exquisitely positioned to ride out this storm, it has made a number of strong changes in recent years that make it a company worth owning. 

First, it's such a dominant player in its industry that it's regularly called a monopoly. Second, it has an absolutely pristine balance sheet. Its debt: $0. Its cash and short-term investments: More than $20 billion. That's just the kind of defensive investment that will likely weather this storm.

If you think it has been painful to be invested in the stock market recently, you haven't seen anything yet. Just wait until there's a recession. Companies will report decreases in their earnings -- or perhaps even losses -- rather than just slower growth. The ones hardest hit will be those that, unlike Microsoft, are swimming in debt. As the banking crisis is reminding us, leverage cuts both ways. Their debt boosted their returns while the economy was soaring, but now that things are slowing down, that same debt will magnify the earnings drop just as quickly.

Has it already started?
The market's recent, broad decline seems to predict an economic slowdown ahead. Even amid the panic, Microsoft has performed quite well compared to some other large, well-known companies during this sell-off:

Company

Short-Term Debt
(in billions)

Long-Term Debt
(in billions)

Fall from
52-Week High

Microsoft

$0.00

$0.00

(14.60%)

Merck (NYSE:MRK)

$1.97

$3.87

(16.70%)

IBM (NYSE:IBM)

$15.73

$19.54

(16.70%)

McDonald's (NYSE:MCD)

$0.06

$7.69

(17.60%)

Hewlett-Packard (NYSE:HPQ)

$3.19

$5.00

(20.12%)

Source: Yahoo! Finance. Debt data from Capital IQ. As of Jan. 22 close.

Sure -- Microsoft's dependence on its Office and Windows products makes it vulnerable to a slowdown in business spending. Then again, GE's power turbine and aircraft engine businesses are vulnerable, too. When the economy turns south, virtually every company is affected in one way or another. If a recession truly does come to pass, I know I'd rather own a company that avoided the type of heavy debt anchor that would only worsen its descent.

Shareholder-friendly tech
Microsoft is in an enviable position as the market -- and potentially the overall economy -- starts to sink. It was one of the first large tech companies to curb its options-based compensation and replace it with grants of actual shares for most employees. By doing so Microsoft far better aligned the interests of its employees and outside shareholders.

Additionally, Microsoft initiated a dividend in 2003 -- and it has boosted its ordinary payout every year since then. Even so, its payout ratio still sits below 30%. As a result the dividend is both easily covered and still has more room to grow.

Between the owner-friendlier compensation package, and the direct payments to owners, Microsoft has proven itself to be a shareholder-friendly technology behemoth. Add its extremely strong financial position, and I can hardly imagine a company more worth owning in a tough market.

Read Rick Munarriz's bear argument.

Bull Rebuttal
Oh please, Rick -- spare us the tale of woe regarding Microsoft's Vista upgrade cycle. Microsoft's biggest customers have been around long enough to know never to be early adopters. The strategy has pretty much always been:

  • Wait for the biggest bugs to be fixed.
  • Wait for the hardware to catch up.
  • Try it out with a few key applications and power users.
  • Then upgrade the end-user base as the PCs come due for replacement.

If you haven't seen that before, you're not paying attention. We're only a year into general release for Vista. I wouldn't expect the biggest customers to even begin their general rollout for another year. It'll be three years after that before it's all done.

As for calling Microsoft soon-to-be-irrelevant thanks to advances by Google (Nasdaq: GOOG  ) and Apple (Nasdaq: AAPL  ) , I'll let these numbers speak for themselves:

Company

Revenue
(in billions)

Gross
Profit
(in billions)

Operating
Cash Flow
(in billions)

Earnings
(in billions)

Net
Margin

Microsoft

$54.07

$42.40

$19.61

$14.88

27.51%

Google

$14.97

$8.99

$4.99

$4.03

26.90%

Apple

$24.01

$8.15

$5.47

$3.50

14.56%

Source: Capital IQ.

Microsoft is turning in some impressive numbers for an "irrelevant" company. We've heard this all before. We'll see who outlasts who.


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