Microsoft (MSFT) is a buying opportunity
02-23-07: Microsoft (MSF) shares have been on the decline in the past few weeks as investors are becoming increasingly concerned over the sales of Windows Vista. According to initial reports, sales of Vista in the first few weeks of release have not doing as well as expected. As a result, last week, Steve Ballmer basically lowered the expectation for Vista sales. Adding insult to injury, yesterday, a judge ruled MSFT will need to pay $1.5 billion to Alcatel-Lucent SA regarding a software patent infringement relating to MP3 technology. MSFT shares are now trading in the $28 range from it 52 week high of $31 per share. Do not panic! Here are some points to keep in mind:
Cash, Cash, Cash: Cash is still king! MSFT has more cash on hand than any company in the world. To keep their stock from falling last year, MSFT has been aggressively buying back shares using its cash reserves. The company dividend payout has also been increasing. No other company even comes close to being able to buy their shares back as aggressively as MSFT. While $1.5 billion is a load of cash, it only a small drop in the bucket for MSFT. Moreover, MSFT will likely appeal so by the time this is done, the actual amount would be much less (assuming MSFT lose).
Valuation Opportunity: Microsoft is a monopoly, always keep that in mind. No matter what anyone might say, Windows will continue to dominate the desktop. There are very little choices out there. There will always be new technology threats from time to time, but MSFT has proven it can prevail. The recent drop in MSFT shares should be viewed as an opportunity to buy. Some will argue MSFT is no longer a growth company so it is basically a waste of time. We agree in part to that statement, the growth rate has not been stellar, but the company’s dominance over the Operating Systems provides a platform to enter any emerging markets or technology the company wants. Bottom line, we would buy MSFT at current level of $28.95 per share.
Catalyst: While the sales of Vista may not be doing quite as well, do not take a short term view. All it will take to force every Dick, Jane and Harry to upgrade is a security threat that only Vista is capable of handling. Most Enterprise customers are currently still testing Vista to make sure it will work with their current infrastructure. This testing phase could last over a year, depending on the size of the company. The key point here is investors must be patient, Enterprise customers will eventually upgrade. When that happens, MSFT will be swimming is more cash. An important point to keep in mind is, the Enterprise is where the real money is for software licensing. The recent report of retail sales of Vista is misleading as it only focuses on the consumer sector.
Comments
Like you site. Thx! BTW, what's your 12 mth target for MSFT?
Posted by: Bob | February 25, 2007 01:18 PM
To be on the conservative side, our 12 month target price for MSFT is $35 per share. We believed this is very achievable. Thanks for visiting our site, Bob.
Posted by: ibooyah | February 25, 2007 01:55 PM
Thx for the response and again, love the site. Kudos!
Posted by: Bob | March 1, 2007 12:08 PM
Hi
I really like your site but would not agree to your comments in this case.
I work for company that makes backup software. I have yet not seen any move by any backup vendor to support full features of Vista. Till backup vendors support Vista, Vista will not enter enterpise market
More over Enterise Market would hop on to Longhorn Server and not Vista which is almost a year away in terms of migration
Posted by: Aditya Kapoor | March 14, 2007 12:27 AM