Microsoft Overview

March 11th, 2005 - Copyright by Morris Rosenthal - - contact info

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Copyright 2005 by Morris Rosenthal

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Notes on trading MSFT stock for investing in my SEP

Microsoft was a lot more fascinating as a stock before they did their one-time $3.00 dividend and announced a huge share buy back. While it points to a company with a super healthy balance sheet, it also suggests a company that's run out of room to grow and has nowhere to spend its cash. The company doesn't have any debt, chairman Bill Gates owns around 10% of the outstanding shares, the stock is trading at somewhat less than half of its bubble valuation, when it was briefly the largest market cap company in the world. Now they trade a P/E a little under 28 times earnings, and they predict that revenue growth will slow in 2005. They still have over $35 billion in cash, so they didn't give it all away, and a book value of $4.34 per share (most of it obviously in cash). For anybody who thinks they are losing their lunch to Linux, Microsoft revenues in servers and tools grew 19% last year. MSN ad revenue grew 43% to over $1 billion, which is pretty sad since they never send me any traffic.

Microsoft revenue is actually up over 50% since the NASDAQ bubble, though margins have fallen. In 2000, Microsoft had $11 billion in operating income on $23 billion in revenue; in 2004 it was $9 billion in operating income on nearly $37 billion in revenue. Of course, that $9 billion number was after $2.5 billion in costs related to the Sun settlement and EU fines, not to mention a $2.2 billion expense related to employee stock options. Microsoft predicts that PC unit growth will be below 10% in 2005, better rush and sell my hardware stocks. I'm less comfortable guessing about MSFT stock than any other computer related stock because I feel like the ant standing the elephants back and describing it as very flat. It's hard to imagine losing ones shirt on MSFT shares, yet, ignoring brief excursions under $25 for the NASDAQ crash and for 9/11, it's trading at a 6 year low.

The only way I'd be comfortable speculating on MSFT shares is on news, it would have to be pretty big news to have an impact. Microsoft acquired Groove yesterday, a company specializing in collaboration or groupware technology. The buzz was that Microsoft bought them to get Ray Ozzie, the founder, but I'm not privy:-) Ozzie was the driving force behind Notes, which was owned by Lotus for a while and acquired in its turn by IBM. I fooled around with Notes in the early 90's, thought it was a great excuse to sell three times as many servers to corporate clients and not much else, but I know people who swear by it.

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