Each year, we take a look back in order to look ahead. We do this by industry, by trend, and ultimately by stock. Here's a closer look at Microsoft (Nasdaq: MSFT), Fool style.
Foolish facts
|
Metric |
Microsoft |
|---|---|
| CAPS rating (out of 5) | *** |
| Total ratings | 14,512 |
| Percent bulls | 86.7% |
| Percent bears | 13.3% |
| Bullish pitches | 2,457 out of 2,997 |
| Highest-rated peers | Radiant Systems, Oracle (Nasdaq: ORCL), MICROS Systems |
Data current as of Dec. 28.
Few stocks generate a bigger divide than Microsoft. Most Fools either love Mr. Softy's valuation, or hate its market position. But don't take my word for it. Here are two dueling CAPS pitches, from two of my favorite Fools.
"OK, I'm sold. T2 Partners' recent excellent presentation on Microsoft bas cause me to see how this company can easily beat the S&P 500 over the next several years ... We have a company that's currently trading at around 12 times its trailing earnings. Using T2's assumption of $2.40/share in earnings for 2011 and assigning the current multiple to that we arrive at a price per share of $33, an [18%] increase from today's price ... not including the dividend," wrote TMFDeej in July.
"I have great admiration for the achievement that was Microsoft in the Bill Gates era. It was in its time a tremendous Rule Breaker, and a model example of a company that really understood how to build a business model based on customer convenience. This was the golden age of Microsoft. The problem is, that was a couple decades ago. The world has changed, and not in a way that favors Microsoft either in the present or, I think, the future," wrote TMFSpiffyPop, aka Fool co-founder David Gardner, in September.
Looking back to look forward
In many ways, the year's big Microsoft stories at Fool.com reflect these divergent views. Fools can't agree on whether Mr. Softy is poised to grow or wilt:
- In March, Netflix (Nasdaq: NFLX) expressed its affection for Microsoft when it previewed its mobile streaming app for Windows Phone 7 before alternatives for the iPhone and BlackBerry. But this isn't surprising. CEO Reed Hastings sits on Mr. Softy's board.
- Two months later, Microsoft joined hands with its old enemy, Apple (Nasdaq: AAPL), in sticking it to Adobe Systems (Nasdaq: ADBE) and its Flash technology. Mr. Softy agreed to support the competing HTML5 and H.264 video file formats in version 9 of Internet Explorer.
- Around the same time, Apple passed Microsoft in market cap. The historic shift led Anders Bylund to urge Mr. Softy to stop trying to solve every tech problem in existence.
- Microsoft took a different approach. In June, the company released a free online version of its Office suite to better compete with alternatives from Google (Nasdaq: GOOG) and Oracle. The Big G responded with an apps marketplace that allows third parties to enhance its productivity software.
- Around the same time, a few of us wondered aloud if CEO Steve Ballmer should step down. He declined, deciding instead to dismiss a few hundred employees to cut costs.
- Mr. Softy also tried to dismiss Windows XP after the release of Windows 7, only to see users rebel. As one IT manager wrote in commenting on the news: "My son uses Windows 7 and as an IT guy, went back to XP. I went back to XP as well. Newer isn't always better."
- Bing caught on in September, capturing 24% of searches during the first week of its deal with Yahoo! (Nasdaq: YHOO). The bad news? Google led all comers by serving 71% of searches.
- Around the same time, Fools decided the clouds circling Mr. Softy had created a buying opportunity. "Cheap stock? Check. Defensible business? Check. Dividends and buybacks? Check. Check. Despite its much-ballyhooed snafus, Microsoft is a stock that you still have to love," wrote Foolish editor and analyst Jim Royal announcing Mr. Softy's inclusion in our 11 O'Clock Stocks portfolio.
- The stock has rallied since, thanks to the success of the Kinect game controller, which has overshadowed news of cloud-computing evangelist Ray Ozzie leaving the company in October.
Looking at Microsoft's financial performance, I can understand why the bulls are buying:
|
|
Q2 2010 |
Q3 2010 |
Q4 2010 |
Q1 2011 |
|---|---|---|---|---|
| Revenue growth | 14.4% | 6.3% | 22.4% | 25.3% |
| Normalized net income growth | 64.9% | 11.2% | 31.3% | 53.3% |
| Gross margin | 80.9% | 81.0% | 80.2% | 80.6% |
| Return on capital | 44.0% | 26.3% | 29.0% | 32.4% |
Source: Capital IQ, a division of Standard & Poor's.
And here's what analysts expect from Microsoft over the next two years, according to data compiled by Capital IQ:
|
|
2011 |
2012 |
|---|---|---|
| Revenue estimate | $68,151 million | $73,240 million |
| Normalized profit per share estimate | $2.43 | $2.68 |
Source: Capital IQ, a division of Standard & Poor's. Data current as of Dec. 28.
Foolish outlook: bullish
Far as I can tell, Microsoft's best days are behind it. But that doesn't mean that those Fools who see value in Mr. Softy are wrong. This stock could very easily be a short-term market beater. I've rated it as such in my CAPS portfolio.
Now it's your turn to weigh in. What do you think of Microsoft's prospects at current prices? Leave a comment in the box below to explain your thinking. You can also join me in rating Microsoft in Motley Fool CAPS.
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