There are very few products or franchises about which we can say with certainty that they'll exist five or 10 years from now. But since I'm here to give my take on the blue chip stock/company to own in the coming year and those that follow, I have to look not only for opportunity but also a degree of inevitability. With this in mind, I give you Microsoft (NASDAQ:MSFT), architect of the Windows operating system and the Office software package.
Got you in a stranglehold, baby
You're probably reading this article using a Microsoft product -- the very stuff upon which Microsoft has built an enduring competitive advantage. In its earlier years, it made software products that, while virtual necessities to the average user, didn't play nicely with other manufacturers' products -- thus making Windows and Office part and parcel of almost every user's arsenal.
In recent years, however, this tactic has been the subject of regulatory reproach, and the company has opened the books on its source code at regulators' behest. But that doesn't matter, since the cost to migrate from a Windows platform is enormous for businesses, and since Windows still carries an element of consumer-staple familiarity to end-users.
Grievances aside, this means Microsoft has been able to build an enormous entrenched user base. As it relates to the upcoming year, remember that Vista is on its way, and the company anticipates something in the vicinity of 25% revenue growth, per its Q1 conference call.
Not a one-trick pony
But Microsoft's not just Office and Windows. Microsoft also has the xBox 360, its recently developed adCenter platform, newly revamped portals a la Windows Live, enterprise software, a mobile Windows platform, a recently developed research partnership with Novell (NASDAQ:NOVL) on Linux, and an in-development software-as-a-service platform -- the model that's made companies like Salesforce.com (NYSE:CRM) perpetual Wall Street darlings on consistently amazing investment returns. And that only just scratches the surface.
While none of these divisions carries the profitability of the company's core franchises, each of them does offer unique sources of incremental revenue and reduces the company's reliance on PC purchases and/or machine upgrades. For one, look for the company's entertainment and devices division to garner increasing profitability as it reaps the benefits from its ever-growing installed base of xBox 360s (read: royalty revenues). The division should also enjoy increasing scalability as the number of mobile Windows systems continues to grow.
I'd expect the company to gradually turn the corner on online ad sales, given its renewed investment. Even if it shows only some fraction of the profitability that Google (NASDAQ:GOOG) or Yahoo! (NASDAQ:YHOO) enjoys in this area, a breakeven prospect will move the needle measurably for the near term. Long-term, I think we might expect much more, as traditional media content continues its migration online.
Foolish bottom line
But all of this comes at a price. At about $29 per share, Microsoft isn't quite so cheap as it was not that long ago. But I'd still venture to say there's significant upside. On the basis of recent results and prospects going forward, I value Microsoft shares in the vicinity of $32 to $33, with upside of $35 to $36. While I might advise buying on declines, based upon current prices, I'd also note that this is probably one of the better risk-adjusted values out there, particularly if the shares were to decline a buck or two. After all, this isn't the tech flavor of the day, and given the tentative reception to the new Vista and Office products (take a look at that slug of unearned revenue if you don't believe me), I'd lean more to the end of outperformance relative to my expectations.
But I'm one voice among many -- one investment analyst among many attempting to discern where the best blue-chip values lie for the coming year.
Agree with me? Disagree? Join me and over 12,000 other Fools at the Motley Fool CAPS community-intelligence database and do as you're moved -- rate Microsoft an outperform if you agree and an underperform if not. Our goal is to harness the power of individual investors to help determine the best blue chip for 2007. On the basis of your votes, we'll share the community's verdict next week.
To read about the rest of our blue-chip candidates, click here.
Mike Olsen is a research analyst and member of the Global Gains and Inside Value teams; he also owned shares of Microsoft at the time of publication. Microsoft is an Inside Value recommendation, and Yahoo! is a Motley Fool Stock Advisor selection. The Fool is investors writing for investors .
