Night at Roxbury Steve Ballmer Bill Gates

Microsoft: Very Cheap?

I rarely talk stocks here.

But seeing Eddy Elfenbein’s post, on April 14 about how ‘Very Cheap’ Microsoft is– well, that one I can’t pass up.  First, let me say that I don’t disagree with Eddy’s sentiment.

Charts don’t lie– the stock is cheap as measured by the metric he illustrated. Their earnings per share are going up. And Eddy is the man, I’m not questioning his investment prowess. I’ll note in his post– he didn’t say MSFT was a buy, he only said…

Microsoft is currently expected to earn $2.63 per share in this calendar year which means the stock is trading at about 9.6 times this year’s estimate.

The S&P 500 is expected to earn 96.69 this year which means it’s trading at 13.5 times this year’s estimate. That means MSFT is going for a 29% discount to the market’s valuation.

source: crossingwallstreet.com

Keeping it simple- here’s where the stock-is-cheap argument is lost on me.

  1. If you look at Earnings Per Share vs. Enterprise value– you get a completely different (and UGLY) picture.
  2. EPS vs. Price to Sales (Ugly’s cousin: Heinous)
  3. EPS vs. Long Term Debt (Ugly’s drunk cousin: Ludicrous)

Geek chartists will argue the minutia of what I’ve highlighted. Bankers will yammer about untapped potential (ie. more i-banking deals). And analysts– well…

But you can clearly see — Microsoft is selling less, worth less, and more in debt than they were 5 years ago. Fundamentals aside, what kills me about this company is actually their story.

Microsoft went from smartest guy in the room (copying everything of value from Apple), to meanest guy in the room (See: Monopoly Money) to the dumbest guy in the room– missing not one trend, but three major secular computing trends : Mobile, Web, Tablet. And in the case of the tablet form, Bill Gates has been talking about the technology since 2001.

You’d have to go back to Ballmer & Gates doing their Night at the Roxbury skit (98 windows release & the subsequent Y2k pump) to find a better time to be a Microsoft shareholder.

And in the end, they are losing in areas considered their moats: Data, Exchange, & Corporate– to companies that moved into the marketplace (Amazon, Google, Apple). The 800 lbs. gorilla, reduced to chimp. Now Microsoft plays catch-up, struggling to defend enterprise. That’s just silly. And now they’re partnering with another dying dinosaur, Nokia. Great strategy…

So, while Hedge Funds & Institutions (supposedly smart money) may still own Microsoft in size, that size has decreased by roughly 1/2 in the last 5 years.

source: AlphaClone

It’s sad; but not in a way you probably assume.

What saddens me isn’t that Microsoft is dying the death of a 1KB in cuts. Personally, I think it’s deserved. They’ve never innovated in a major way- and that’s the currency of technology. Fanboys will tell me about Xbox & Kinect– or that super awesome coffee table I’ll be buying someday. Yeh, I know. And that Microsoft/Ford Partnership is all the rage too.

No, what kills me about Microsoft is how long we’ve all pretended that they did innovate. How many magazine covers did we give them? How many vaporware demos have we lapped up like Pavlovian pups panting for more? How much money has been left in their charge to shepherd us into a brighter 21st century? How many times over have our schools & hospitals been promised a reboot?

Do we listen to another sweaty Steve Ballmer spiel that would make a used car salesman blush? Or yet another elaborate story about why the car is stuck in the ditch, and ‘it’s not as bad as it looks.’

As reasonable people, how long do we keep looking at the same dying business run by rudderless leaders & say it looks cheap?

But, I guess the same could be said for Wall Street.

Roll tape please:

_______________________________

Reference:

Institutional Ownership (MSFT) – AlphaClone.com

Microsoft Looks Very Cheap – CrossingWallStreet.com

United States vs. Microsoft – Wikipedia

Can Apple turn an iCloud into the next killer app? – ComputerWorld

Ballmer Sells Windows 1.0 – YouTube

Microsoft Courier Demo – YouTube

The Zune is Finally Dead – Business Insider

3 thoughts on “Microsoft: Very Cheap?

  1. Pingback: Morning News: April 19, 2011 Crossing Wall Street

  2. R. Davis

    It appears to me that you are using Price-to-Sales incorrectly. You indicate “Microsoft is selling less” but the Price-to-Sales metric does not measure this. It merely measures the stock price vs. sales (like P/E ratio). All things equal, a lower P/S ratio would imply a cheaper stock (just like lower P/E ratio) as now you are getting a higher % of sales per share. I also think it is a mistake to look at the long term debt in a vacuum. MSFT has a very strong balance sheet with a significant amount of cash. I believe they sold some debt because they are able to do so at very low rates and that the return on capital may exceed the cost of the debt (I believe they may have also sold some in order to increase share buybacks/dividends while possibly avoiding repatriation – just from memory though as I am not a shareholder). Enterprise Value is just looking at the markets valuation of the firm (including all security holders – bond holders, common stock holders, etc). The whole point of the Eddy’s note was the stock appears cheap which would relate to a relatively cheap enterprise value.

    Your arguments about MSFT missing trends, etc., are worthwhile exploring but I feel that the metrics you charted seem to point more towards MSFT being relatively cheap (lower P/S ratio, lower enterprise value despite increasing earnings) than making the point you intended.

  3. insert foot here

    I see how you think I’m making the jump using Price to Sales as my proof for selling less– sorry about that. I’m not; I’m actually just saying they are selling less. My writing should have been more clear.

    As for the debt comment– I understand the strategy behind the ballooned debt structure– but it’s a strategic move for the lazy, probably something a banker convinced them to do– instead of focusing on growth.

    Microsoft actually issued debt to pay a dividend. I’m speechless.
    http://www.bloomberg.com/news/2010-09-13/microsoft-is-said-to-plan-debt-sale-to-pay-for-dividends-buy-back-shares.html

    As for Enterprise value, I know what it means– as a shareholder I’d want it to be higher not lower. As a bystander it may look cheap, but buggy whips, at some point, looked really cheap too.

Comments are closed.