MSFT

[ERICOPOLY]

from Bill Fleckenstein (from friend's subscription):

 

People are enthralled with Apple's doodads even though life in the business world could easily go on without Apple, while it could not without Microsoft.

 

Strange that Apple is 12x forward earnings despite it's huge popularity.  I don't think their growth is dead quite yet.

 

[Guest]

I have no idea what will happen with Apple. Considering it's growth projections, it doesn't seem very expensive. With that being said, where will apple be 10 years from now? Still with Iphone? Ipad? Holographic system? I have no idea. Remember back in 2007, RIMM could not be stopped. I think good, old Cramer even called RIMM one of the "four horseman." Now, nearly everyone hates it.

 

Apple is incredibly well managed. There is no doubt about that. The level of innovation is incredible. How much of the company's success is dependent on Jobs? I'd venture to say a ton. With his health issues, his focus could be off pretty easily.

 

With the level of competition and uncertainty about Jobs, maybe that is why the stock seems reasonably priced. I don't know.

 

One last thing to consider, too. My cousin who dabbles in the stock market, loves apple. He is no doubt a nice guy. But he was also bragging about buy "COW" back in 2008 or so.

[prunes]

Apple's success, in my opinion, is largely due to Steve Job's design aesthetic of simplicity and sleekness. I don't argue that Apple isn't a great innovator but I might liken it to running on a treadmill. You can't stop. Contrast Apple's moat with Microsoft's, all else being equal. Whose moat would you rather have?

 

For companies that are such darlings of Wall Street, I am surprised when I see the relatively low multiples that AAPL and GOOG are trading at.

[rjstc]

    ShahKhezri

 

Am reading a new book by Howard Marks of Oaktree Capital Management where he talks about combating negative influences." The biggest investing errors come not from factors that are informational or analytical but from those that are psychological." This piece by Fleckenstein is right on. It has been a long time but I wonder if there has been so much negative talk for so long about MSFT it"s like the swing of the pendulum and this might be coming to the point where it starts swinging the other way. Buffett also thought it undervalued and I doubt would have commented if he thought it might implode. I like Apple but how long can they keep hitting nothing but home runs? MSFT with all their so called problems keeps making lots of money. Ron

[ERICOPOLY]

I bought some MSFT 2013 $15 strike calls a moment ago for $10.63 and $10.65.

 

Funny thing is, stock is trading at $25.60.

 

So I paid a 3 cent to 5 cent premium for the advantage of borrowing $15 for 21 months.

 

It seems like a good value.

 

 

[finetrader]

So I paid a 3 cent to 5 cent premium for the advantage of borrowing $15 for 21 months.

..but you don't get the dividend

Still, it seems a cheap premium

[txlaw]

The biggest of these is probably cloud computing concepts, followed by mesmerization with all things Apple. People are enthralled with Apple's doodads even though life in the business world could easily go on without Apple, while it could not without Microsoft.

 

This Fleckenstein fellow may be right about the market misunderstanding MSFT, but he shows a poor understanding of what AAPL does, which indicates that his thesis is based not on sound analysis, but on some vague notion of contrarian investing.

 

He will be right on MSFT for the wrong reasons, in other words.

[ERICOPOLY]

I have INTC calls so I'm happy to see Apple now choosing to go with Intel chips for iMacs.

 

Other interesting news today -- RIM announcing that Microsoft BING will replace Google search and maps in Blackberry.

 

 

 

 

 

[rmitz]

I have INTC calls so I'm happy to see Apple now choosing to go with Intel chips for iMacs.

 

Other interesting news today -- RIM announcing that Microsoft BING will replace Google search and maps in Blackberry.

 

Eh?  Macs have been on Intel for years now.

[rmitz]

I have INTC calls so I'm happy to see Apple now choosing to go with Intel chips for iMacs.

 

Other interesting news today -- RIM announcing that Microsoft BING will replace Google search and maps in Blackberry.

 

Oh, you mean iPads and other iStuff?  I hadn't seen that yet.  The main iMac/etc line has been intel for some time.

 

Though that doesn't make sense to me...unless they just mean that Intel manufacturing is going to make the Apple owned processor designs.  They bought a lot of IP for that, and the manufacturing is a low-margin business so I wouldn't get too excited about profits there.

[ERICOPOLY]

I have INTC calls so I'm happy to see Apple now choosing to go with Intel chips for iMacs.

 

Other interesting news today -- RIM announcing that Microsoft BING will replace Google search and maps in Blackberry.

 

Oh, you mean iPads and other iStuff?  I hadn't seen that yet.  The main iMac/etc line has been intel for some time.

 

Though that doesn't make sense to me...unless they just mean that Intel manufacturing is going to make the Apple owned processor designs.  They bought a lot of IP for that, and the manufacturing is a low-margin business so I wouldn't get too excited about profits there.

 

Intel doesn't have a chip that would suitable for iPads and mobile devices (power consumption is the issue).  This announcement today is with regards to the iMacs.

 

For the new iMac, Intel's chip had been previously recalled due to a flaw.

 

However, there is meant to be a project for mobile devices like the iPad:

 

http://finance.yahoo.com/news/Will-Intel-Build-Chips-For-siliconalley-959310540.html?x=0&.v=1

 

On last month's earnings call, Intel CEO Paul Otellini said it would announce in May a major technology advance that lets it make chips with circuitry just 22 nanometers apart -- about 50% thinner than the 32-nanometer technology it uses today. Those chips would be smaller and use less power than today's, making them perfect for low-powered mobile devices.

 

The A5 that Samsung manufactures for Apple's iPad 2 uses a 45 nanometer manufacturing process.

 

[txlaw]

I think there is some confusion here.

 

The iMac line has been using Intel chips for some time now.  But there was a product line refresh today that includes newer Intel processors as well as Intel's LightPeak technology.

 

On top of that, the rumor is that Intel is trying to get Apple's fab business for the various iDevices. 

 

See http://arstechnica.com/business/news/2011/05/intel-to-fab-arm-chips-for-apple-its-possible.ars

 

Finally, there is the upcoming announcement that Intel talked about on the CC, which could be a doozy for Intel's share of the mobile market if you believe Otellini.

[ERICOPOLY]

Here is what Microsoft is saying regarding free Office online model.  I'm not sure I quite believe it will make 2-6x more money for Microsoft, but wouldn't it be interesting if they get just some of that?

 

http://newenterprise.allthingsd.com/20110418/office-365-hits-public-beta-today-so-microsofts-ron-markezich-gets-seven-questions/

 

With this you’re making fundamental changes to how a key Microsoft franchise that has brought in billions upon billions of dollars is sold. Can this new model ultimately catch up with and supplant the old one?

It’s even more than that. We’ve made a version of Office that anyone can use online for free. But as a business model we see this as something that can be beneficial to Microsoft in a couple of ways. One, every customer that has bought BPOSS, we see their total software spend with Microsoft go up. Even that customer I told you about that saved 50 percent, they still are spending far more than they did before. For one, they were just buying Exchange Client Access Licenses. Now they’re buying Exchange CALs, plus spending some money for the service. Now we don’t make as much profit margin, but we make some profit margin on that. But the biggest reason is that most of the time, they buy other things from Microsoft. They buy new versions of Office, they might be buying Active Directory if they didn’t have it before. They might not have had Sharepoint or Lync, and now they’re buying those. So every one of these customers, we see their total spend with Microsoft go up anywhere from 2 to 6 times what it was before. The other thing is that if you look at the total industry spend, most of it is on activities where there’s no value added. Every dollar you spend on software from Microsoft, you spend $6 trying to get it to do anything. What we’re trying to do is drive that six dollars to zero.

[onyx1]

MSFT then, and now.

 

    Five years ago this month, David Einhorn (Greenlight Capital) presented his case for MSFT at the Ira W. Sohn Investment Research Conference for charity.  A link to his speech can be found here.  His case was based mostly on relative value.  His argument was that MSFT “is simply the best company built in the last 30 years” and with its growth potential, it should not be trading at a multiple lower than Coca-Cola, Kellogg, Colgate, Adobe, or RIMM.  He also argued that the market was assigning zero value to the 15% of revenue in R&D spent each year. 

 

I thought it would be interesting to take a snapshot of MSFT five years ago vs. today, here are the results:

 

                                LTM                        LTM

                                March 2006              March 2011            % Change

                                ---------------          ----------------          ------------

Revenue (bil)                    43                        69                        +60%

EBIT  (bil)                        17                        28                        +65%

EBIT Margin                    39%                      40%               

Avg Shares (bil)            10,578                    8,562                        -19%

EPS                              $ 1.26                      2.52                      +100%

Dividend                        $  .42                        .61                      +45%

R&D  (bil)                        6,387                    9,000                      +41%

Share price                    $23.00                  $25.82                      +12%

Net Cash/share              $ 3.17                  $ 4.15                   

Price less net cash          $19.83                  $21.66                        + 9%

P/E adj. for net cash          16X                        9X     

 

      Einhorn believed it was a sure thing that MSFT would grow earnings, and he was right on that part.  The stock price, however, hasn’t even come close to keeping up with earnings growth.     

 

[Myth465]

The biggest issue with his thesis was the word relative value. Its such a dirty word. WMT, HD, JNJ, and a bunch of other companies feature the same story.

He is right about one thing though. MSFT is an amazing company, the more I think about it. Their competitors give the products away for free and still cant win, talk about a moat.

[Guest Bronco]

The missing piece...almost 90 billion spent by microsoft on a declining asset - it's own stock.

 

Absolute atrocious capital allocation and the result is Msft is at 25.

 

And wsj wants apple to do this? 

 

Don't want to start a new debate.  Just my 2 cents for any newbies.

 

 

 

[ERICOPOLY]

Bronco, you complain about the buyback debates but then you just keep restating your case.  Do you want to leave the topic alone or what?

[enoch01]

MSFT then, and now.

 

     Five years ago this month, David Einhorn (Greenlight Capital) presented his case for MSFT at the Ira W. Sohn Investment Research Conference for charity.   A link to his speech can be found here.  His case was based mostly on relative value.  His argument was that MSFT “is simply the best company built in the last 30 years” and with its growth potential, it should not be trading at a multiple lower than Coca-Cola, Kellogg, Colgate, Adobe, or RIMM.  He also argued that the market was assigning zero value to the 15% of revenue in R&D spent each year. 

 

I thought it would be interesting to take a snapshot of MSFT five years ago vs. today, here are the results:

 

                                LTM                         LTM

                                March 2006              March 2011             % Change

                                ---------------           ----------------           ------------

Revenue (bil)                     43                         69                         +60%

EBIT   (bil)                         17                         28                         +65%

EBIT Margin                     39%                      40%                 

Avg Shares (bil)            10,578                     8,562                        -19%

EPS                               $ 1.26                      2.52                      +100%

Dividend                         $  .42                        .61                       +45%

R&D  (bil)                        6,387                    9,000                       +41%

Share price                    $23.00                  $25.82                       +12%

Net Cash/share               $ 3.17                   $ 4.15                   

Price less net cash          $19.83                  $21.66                        + 9%

P/E adj. for net cash           16X                         9X     

 

       Einhorn believed it was a sure thing that MSFT would grow earnings, and he was right on that part.  The stock price, however, hasn’t even come close to keeping up with earnings growth.     

 

 

Thanks for that update.  I finally had to capitulate and buy earlier this week.  30% profit margins, growing revenues, selling at 9X trailing - incredible.  Never thought we'd be saying that about Microsoft.  Honestly I thought I'd never own this company...

[rjstc]

  And Buffett says he thinks it's undervalued. How long until the market realizes? Who knows. How much to reproduce something like MSFT and at what cost. Most people bad mouth this companys stock. They did the same to Wash Post, KO, etc while Buffett was buying and waiting then.

[Guest VAL9000]

The missing piece...almost 90 billion spent by microsoft on a declining asset - it's own stock.

Money well spent if you ask me.  Now I can pick up a share that buys me 10% more of the company than it did before the buybacks started.  Sweet, thanks again Mister Softee!

 

Seriously, though, the buybacks might seem stupid but at one point they will make a difference.  If they bought back all the stock except one share, you'd expect it to be worth about $250bn.  We'll get to a proper repricing of the outstanding shares sometime between now and that point.  Thinking about how Buffett would value Microsoft, he'd encourage us to look at what we'd pay for the whole company.  The number of shares outstanding and share price are derivatives of that thought process.

 

[Guest Bronco]

Just had to point out flaw on einhorn.

[Guest Bronco]

Val- no argument from me!

[ERICOPOLY]

Just had to point out flaw on einhorn.

 

But actually Einhorn paid those same prices.

 

There was no flaw from Einhorns perspective -- if he thought those buyback prices are crazy then HE IS THE ONE WHO IS CRAZY for not taking the money and running.

 

Thus, if not crazy then he loved the prices.

 

[Myth465]

You 2 love this game  ;D

[Guest Bronco]

That's as far as I'm taking it. 

 

Again, I think we all agree softee is cheap.  I reiterate that I think it will stay cheap for a while simply because it ain't Apple. 

 

Interesting in the other thread that we all see a market correction and cheap big tech stocks.  Chalk one up formthe good guys