Foolish Forecast: Whither Microsoft?

Microsoft (Nasdaq: MSFT  ) reports fourth-quarter and year-end results tonight. The third quarter made my Foolish compadre Rick Munarriz think "stagnation!" and the never-ending give-and-take between Redmond and Yahoo! (Nasdaq: YHOO  ) ... well, it just never ends. Let's get a snapshot of Microsoft's challenges and prospects today.

What Fools say:
Here's how Mr. Softy's CAPS rating stacks up against some of its peers and competitors:

 

Market Cap (billions)

Trailing P/E Ratio

CAPS Rating

Microsoft

$255.1

15.9

***

International Business Machines (NYSE: IBM  )

$171.3

16.3

***

Google (Nasdaq: GOOG  )

$166.7

36.7

***

Oracle (Nasdaq: ORCL  )

$105.2

19.3

****

Yahoo!

$31.3

30.8

**

VMware (NYSE: VMW  )

$14.7

65.1

***

Data taken from Motley Fool CAPS and Yahoo Finance on 07/17/2008.

"This stock is due for movement," says CAPS player Richardl1130, supporting his bullish rating of Microsoft's stock. "lowering the xbox pricing, striking agreements with Netflix (Nasdaq: NFLX  ) , showing they are not afraid to go after Yahoo. They need some action with the stock and will make short term gains by whatever means necessary." Let me just note that a strong share price comes in handy for expensive stock-swap acquisition deals.

But the bears have a response or two ready. "Microsoft is currently too big to expand significantly above where they currently are," says all-star Fool simultaneouslee. "Also, with Bill Gates no longer involved in Microsoft and the more eccentric Steve Ballmer running the show on his own, not as many investors will be inspired by Steve Ballmer's visions for Microsoft as they were Gates."

Again, a quick note: Gates is no longer a Microsoft employee, but he remains chairman of the board. Ballmer is not entirely on his own.

What management does:
Microsoft's margins remain as fat as ever, and most large companies would be quite happy with these growth figures. With a 15.9 trailing P/E ratio, Microsoft stacks up nicely against competitors with a higher multiple.

Margins

12/2006

3/2007

6/2007

9/2007

12/2007

3/2008

Gross

79.4%

80.7%

79.1%

78.4%

80%

79.3%

Operating

36.6%

39.1%

37.2%

37.9%

40.7%

36.8%

Net

25.9%

28%

27.5%

27.5%

29.3%

28.3%

FCF/Revenue

25.9%

29.2%

30.4%

31.9%

33.9%

33%

Y-O-Y Growth

12/2006

3/2007

6/2007

9/2007

12/2007

3/2008

Revenue

11.4%

16.2%

15.4%

19.2%

25.7%

16.9%

Earnings

(8.8%)

2.9%

11.6%

15%

42.4%

18.5%

All data courtesy of Capital IQ, a division of Standard & Poor's. Data reflects trailing-12-month performance for the quarters ended in the named months.

One Fool says:
OK, so Microsoft is on sale right now -- but perhaps with good reason. The company is facing unprecedented obstacles on every side. There's Google's impenetrable dominance of online search and advertising; the botched Yahoo acquisition and the cat-and-mouse game that followed; the realization that Windows Vista is not the ubiquitous crowd-pleaser it was meant to be; Motley Fool Stock Advisor pick Nintendo's dominance in the game console war; Gates' departure from his software architect post; and I could go on. Nothing comes easy for Mr. Softy these days, and its exalted place in the software market may not be long for this world.

Now, Microsoft won't die this quarter, or year, or decade. It's just that its Midas touch seems to be gone and the future of the company looks uncertain. In the meantime, it remains a cash machine -- a rare tech stock with a respectable 1.6% dividend yield. These guys stand at a crossroads, and so do investors. Steer clear of Microsoft's stock to avoid the risk of further missteps and a failure to come up with a new, solid business plan -- or buy and hope that Ballmer gets his act together. Me, I'm staying on the sidelines.

Microsoft is a Motley Fool Inside Value recommendation. VMware and Google are Motley Fool Rule Breakers picks. Netflix is a Motley Fool Stock Advisor recommendation. Try any of our Foolish newsletters today, free for 30 days. Or just sign up for a free CAPS account to find the identities of your fellow Fools who were quoted above. They might have more to tell you!

Fool contributor Anders Bylund owns shares in Netflix and Google, but holds no other position in any of the companies discussed here. You can check out Anders' holdings if you like, and Foolish disclosure is the Punxsutawney Phil of financial forecasting.


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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 July 17, 2008, at 8:18 PM, prose976 wrote:

    Cracks me up how nobody sees anything positive, sensational, groundbreaking or just plain old great, in Microsoft's future. So many Google and Apple "fan boys" out there seem to be caught up in the euphoria and bedazzled by the halos of these two companies (especially). Microsoft is passe? Microsoft is a dying giant? Might as well say Coca Cola is on its way out. Anyways, it's sometimes difficult to understand columnist thinking, but I believe its morel about being popular with the readers than being observant, objective and realistic. Has anyone see the move "Sweet smell of Success" lately? Nothing changes in the media circus...and it's a little disturbing that most readers just believe whatever they read these days. It's kind of like creating a self-fulfilling prophecy or writing the story of history...before the events actually take place. When the public is taken in by the hype, speculation and propaganda, then we have a truly controlled society. Funny how the internet has always been hailed as the great liberating innovation of our age, when actually it serves more to confuse and mislead than anything. True, even Benjamin Franklin wrote fictional stories and colums to push up newspaper sales, but these fictional colums actually provided sage advice and counsel. Today fictional colums are self-serving and paid by sponsors directly or indirectly, but nonetheless paid. Sad state of affairs.

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