Vish_ram Posted May 6, 2011 Share Posted May 6, 2011 (If true) I'm surprised Buffett is bullish on MSFT. The fact is MSFT is rapidly losing mind share amongst consumers. This is reflected in declining sales of windows. Every one from fortune to NY times has cataloged their foibles. The biggest issue with MSFT is the present management culture that doesn't foster innovation and the change in the business model of delivering software. On windows, it is so buggy, virus prone that everyone hates it. they will survive for a long time in corporate america. Everyone I know wants a mac and is not rooting for a windows. On office, once you have open format, the proprietary msft format will slowly die and the moat of office will be mostly gone. The new generations ipad and playbooks are going to get more and more powerful and will come up keyboard and other stuff to pretty much replace laptop/desktop. what is now looked at as consumption device will become a device for creating content. what made msft a formidable competitor? it is the bundling. they added all the stuff and gave a single price that pretty much made competing impossible. Now who wants to buy the bundle? Unlike oracle that makes business software, the switching costs of msft products are very low (at least in PC world). The moat is not that strong. In technology, don't ever think of a gradual decline, things will be swift and will move in lightning speed. If WINTEL got economies of scale in yesteryear's, don't you think same thing will happen for new breed of computing. its already happening. Read articles saying how APPL is making ipad cheaper than competitors. Market is way too smart, it is pricing ahead. Maybe there is a 20% chance that market is wrong. The only bright spot is emerging markets and corporate world. In tech area, if models change (paradigm shifts), the incumbents always end up in the losing side. The companies that MSFT/Intel sent to graveyard can attest to that. Link to comment Share on other sites More sharing options...
Guest VAL9000 Posted May 6, 2011 Share Posted May 6, 2011 Hi Vish, I disagree with a lot of what you've said, but I don't want to get bogged down in the nitty-gritty. Here are just a couple of thoughts: The biggest issue with MSFT is the present management culture that doesn't foster innovation and the change in the business model of delivering software. I'd credit present management with these innovations: Kinect, Surface, Windows 7, Azure, Office 365, Xbox 360, Xbox Live, Bing, and Windows Phone 7. Some of these offerings are in different stages than others, but they certainly demonstrate Microsoft's willingness to experiment with new technologies and business models. On windows, it is so buggy, virus prone that everyone hates it. they will survive for a long time in corporate america. Everyone I know wants a mac and is not rooting for a windows. Yeah it's really not that buggy. I've run Windows 7 on five different machines in my house, including a Mac Mini. I don't think it's crashed once. What users fail to understand is that the software (and hardware) that runs on Windows is rarely as rigorously tested as Windows itself. Mostly people are idiots when it comes to software and they blame Windows because that's the common thread. Also, viruses come with the territory. It's myopic to believe that another operating system would achieve Windows-level popularity without falling prey to a swath of security threats. But hey, that's life in the big leagues. On office, once you have open format, the proprietary msft format will slowly die and the moat of office will be mostly gone. This exists and nobody cares. Cloud delivered office apps, however, are a real threat, so I agree with you there. The new generations ipad and playbooks are going to get more and more powerful and will come up keyboard and other stuff to pretty much replace laptop/desktop. what is now looked at as consumption device will become a device for creating content. The assumption here is that Microsoft will miss out on this action. The PC cycle has lasted about 30 years so far. By comparison, smart phones have been around for about 5 years, and tablets for 2 years. Unlike oracle that makes business software, the switching costs of msft products are very low (at least in PC world). The moat is not that strong. Microsoft makes a ton of their revenue from server applications. Migrating these customers to the cloud will make this stickier than it already is. Market is way too smart, it is pricing ahead. Maybe there is a 20% chance that market is wrong. Maybe. If there's a 20% chance that this stock is undervalued by 80% then I'm going to take the opportunity to invest. - VAL Link to comment Share on other sites More sharing options...
rjstc Posted May 6, 2011 Share Posted May 6, 2011 Vish_ram Reuters: You’re always looking for value. What about Microsoft? I know you say you don’t do tech. But given that it has a forward P/E right now that’s below 10, it seems like a value play. Buffett: Yeah. I agree with you. I regard myself as precluded from either personally or having Berkshire buy Microsoft because if something good happened the following week people would think Bill had told me. So I just see no way that we can ever buy Microsoft and be sure that we won’t look like we had some kind of inside information or something. So it’s off limits. It did look pretty cheap. Link to comment Share on other sites More sharing options...
rjstc Posted May 6, 2011 Share Posted May 6, 2011 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/CF 8.3, FWD PE 9.3 , ROE 44%, , No debt, Curr Assets 2XLiabilities, PEG Payback about 6yrs EPS growth, 3yr Avg 13.9%, Rev 3yr Avg 6.9% If it's name wasn't Microsoft I'd bet a lot of people would be interested. Link to comment Share on other sites More sharing options...
ERICOPOLY Posted May 6, 2011 Share Posted May 6, 2011 Market is way too smart, it is pricing ahead. Maybe there is a 20% chance that market is wrong. I don't understand who they think is going to win. Apple not priced like it's going to. Link to comment Share on other sites More sharing options...
rjstc Posted May 6, 2011 Share Posted May 6, 2011 Watched two videos of Buffett and Ajit ? while they were in India on NDTV where they were being interviewed by a bunch of students. Like he told them. "Be Rational", and "Study the business and numbers and ignore the noise" Link to comment Share on other sites More sharing options...
sswan11 Posted May 6, 2011 Share Posted May 6, 2011 Possible worry re INTC? http://www.computerworld.com/s/article/9216477/Apple_defection_would_be_slap_in_the_face_to_Intel Link to comment Share on other sites More sharing options...
Ross812 Posted May 6, 2011 Share Posted May 6, 2011 Apple has a great business model. They lock the consumer into buying new hardware to continue to use their apple software. Apple makes even more money by offering over priced but convenient media. Apple is sexy and I believe it to be a fad. Their business model relies on coming up with the next greatest thing... how long can they keep it up? They have a one year moat. Other companies are already producing tablets superior to the ipad, the iphone, and you can buy a music player at a fraction of the cost of an ipod. Microsoft is boring but they make the software that runs the economy. You can use an apple at home but when you have to get some work done you are going to sit in front of a windows pc. That is a real moat, and it won't go anywhere anytime soon. Link to comment Share on other sites More sharing options...
Ross812 Posted May 6, 2011 Share Posted May 6, 2011 I think apple's advantage is erroding rapidly with the growing popularity of the android os. Apple is going to have a really hard time competing wwith free. I look at Microsoft in the same way I look at Google. Microsoft has a great moat just like Google's search and they are going to continue to throw money around until something sticks and they can move the needle. Msft is undervalued right now. The opportunity will not last forever. Link to comment Share on other sites More sharing options...
goldfinger Posted May 7, 2011 Share Posted May 7, 2011 I think apple's advantage is erroding rapidly with the growing popularity of the android os. Apple is going to have a really hard time competing wwith free. I look at Microsoft in the same way I look at Google. Microsoft has a great moat just like Google's search and they are going to continue to throw money around until something sticks and they can move the needle. Msft is undervalued right now. The opportunity will not last forever. Ross I like the way you think. I believe the same. Hopefully we are not completely wrong! I heard Bing is a great search engine. Let's see what happens there... Link to comment Share on other sites More sharing options...
Ross812 Posted May 7, 2011 Share Posted May 7, 2011 Bing is a good search engine. Microsoft has the advantage of Internet explorer autoautomatically routing to Bing which gives them some defacto market share. With that said, I think google is going to keep a dominant position in search. I am predicting a bit of a fight between google and Apple in the next couple years which might benefit Bing if apple sets Bing as their new default on Safari. I am just trying to think of catalysts... Link to comment Share on other sites More sharing options...
S2S Posted May 7, 2011 Share Posted May 7, 2011 re: Bing, let me play the devil's advocate: http://techcrunch.com/2011/04/29/microsoft-internet-bloodbath/ http://tctechcrunch.files.wordpress.com/2011/04/chart-of-the-day-microsoft-online-operating-income-mar-2011.jpeg Link to comment Share on other sites More sharing options...
shalab Posted May 7, 2011 Share Posted May 7, 2011 It will take a while to get this right. My guess is these guys are paying Yahoo! a bunch of money to get traffic and Yahoo! is not doing well. They will eventually get it right - it may take another five years for it to be profitable though. There will be split market between Google and Microsoft for this stuff - it could end up being 90-10 (revenue/profit) or 70-30 or 60-40. The profits you see before came from MSN competing with AOL. Link to comment Share on other sites More sharing options...
S2S Posted May 7, 2011 Share Posted May 7, 2011 I don't doubt that they can get this right, but as is the case with hockey stick projections, the odds are not overly favorable. Their competitors aren't going to merely stand and watch, and I will add to that group Facebook (closed loop network with their own search engine), Amazon (Web Services), Apple (soon?), among a myriad of others. Link to comment Share on other sites More sharing options...
alpha231616967560 Posted May 7, 2011 Share Posted May 7, 2011 Having been in the search engine business indirectly for more than a decade, I think of Google like Coke or Wrigley's. It is the brand name that everyone knows and goes to. It is their organic (non-paid) search results that provide the moat because of the quality of those results. Everyone knows this either consciously or otherwise. It is the reason that they beat Yahoo! and AOL back in the day and continues to be the reason that most people use them as a search engine. MSFT may have some small success in eroding that moat, but my guess is that it will be mostly people who don't think or know to change their default search provider from an OEM PC. With 60% of market share, and no competitor having even 10% Goog is not going anywhere... Link to comment Share on other sites More sharing options...
rjstc Posted May 7, 2011 Share Posted May 7, 2011 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/CF 8.3, FWD PE 9.3 , ROE 44%, , No debt, Curr Assets 2XLiabilities, PEG Payback about 6yrs EPS growth, 3yr Avg 13.9%, Rev 3yr Avg 6.9% If it's name wasn't Microsoft I'd bet a lot of people would be interested. I say again that if this is standing still and BING only adds minimal or nothing more from here anyone looking at these would not say this is a dying company. Or if you took out the name Microsoft and just looked at what this company has been doing money wise "Most" value investors including Warren Buffett recently, in an interview recently with Reuters which I posted previously, would say this looks undervalued. Link to comment Share on other sites More sharing options...
Rabbitisrich Posted May 7, 2011 Share Posted May 7, 2011 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/CF 8.3, FWD PE 9.3 , ROE 44%, , No debt, Curr Assets 2XLiabilities, PEG Payback about 6yrs EPS growth, 3yr Avg 13.9%, Rev 3yr Avg 6.9% If it's name wasn't Microsoft I'd bet a lot of people would be interested. I say again that if this is standing still and BING only adds minimal or nothing more from here anyone looking at these would not say this is a dying company. Or if you took out the name Microsoft and just looked at what this company has been doing money wise "Most" value investors including Warren Buffett recently, in an interview recently with Reuters which I posted previously, would say this looks undervalued. I don't want to start a new debate, but it's obvious from those numbers that higher EPS doesn't contribute to shareholder value. Instead of wasting time with capital destroying actions like buybacks and earnings growth, MSFT should pay out 100% FCF immediately. Link to comment Share on other sites More sharing options...
PlanMaestro Posted May 7, 2011 Share Posted May 7, 2011 I don't want to start a new debate, but it's obvious from those numbers that higher EPS doesn't contribute to shareholder value. Instead of wasting time with capital destroying actions like buybacks and earnings growth, MSFT should pay out 100% FCF immediately. What about capital destroying R&D? Link to comment Share on other sites More sharing options...
rjstc Posted May 7, 2011 Share Posted May 7, 2011 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/CF 8.3, FWD PE 9.3 , ROE 44%, , No debt, Curr Assets 2XLiabilities, PEG Payback about 6yrs EPS growth, 3yr Avg 13.9%, Rev 3yr Avg 6.9% If it's name wasn't Microsoft I'd bet a lot of people would be interested. I say again that if this is standing still and BING only adds minimal or nothing more from here anyone looking at these would not say this is a dying company. Or if you took out the name Microsoft and just looked at what this company has been doing money wise "Most" value investors including Warren Buffett recently, in an interview recently with Reuters which I posted previously, would say this looks undervalued. I don't want to start a new debate, but it's obvious from those numbers that higher EPS doesn't contribute to shareholder value. Instead of wasting time with capital destroying actions like buybacks and earnings growth, MSFT should pay out 100% FCF immediately. Hi; What do you think their shareholder value is? Link to comment Share on other sites More sharing options...
Guest VAL9000 Posted May 8, 2011 Share Posted May 8, 2011 re: Bing, let me play the devil's advocate: S2S, I remember seeing this chart on TechCrunch recently. It took me a while to come up with a good argument as to what Microsoft is up to here. I think there's some justifiable value behind building a search engine just for technology's sake, but there's more going on here than just wanting to be good at search. The way I see it, this isn't just about Microsoft getting something for themselves. This is about taking something away from Google. The 2 billion or so per year lost on Bing must cost Google so much more than that. My reasoning is that by investing in search they create competition in the market for technology, qualified engineers, and customers. No doubt Microsoft understands the value of a monopoly. Handing over search engine dominance would be so lucrative to Google that it would put Microsoft even further behind in it's consumer facing online offerings. Ps. I painfully wrote this post on my iPad. There's still a long way to go when it comes to the tablet wars... Link to comment Share on other sites More sharing options...
Ross812 Posted May 8, 2011 Share Posted May 8, 2011 I would not take the bet that Bing is going to hurt Google. My argument is Microsoft has the clout to throw around some money and see what sticks. They are not going to have a huge share of the tablet market aside from people who want windows 7 on their tablet out of habit. Microsoft will continue to rule the corporate space because the make the software that business runs on. I cannot see this changing anytime in the foreseeable future. They will grow slowly as their software is implemented overseas. They have an amazing moat and are selling at an attractive price. Sign on to DATAROMA and see where Microsoft falls on the list of top buys. Link to comment Share on other sites More sharing options...
ERICOPOLY Posted May 8, 2011 Share Posted May 8, 2011 I think there's some justifiable value behind building a search engine just for technology's sake, but there's more going on here than just wanting to be good at search. IE9 asks you if you want to allow Bing to make recommendations. So when you start typing an URL in the address bar, it helps you type the rest. It always did this before, however it was based on your previous browing history, not a search database. Link to comment Share on other sites More sharing options...
Guest VAL9000 Posted May 8, 2011 Share Posted May 8, 2011 Ross, Google's annual sales are now $20.9bn from search ads on roughly 65% of the search market*, that's $321mm per percent share of search. Microsoft owns 30% of the search market through Bing and their partnership with Yahoo. One could argue that by investing in search, Microsoft deprives Google of 30* $321mm = $9.6bn of revenue per year. That alone is worth the entry fee of $2bn/year. I'm long Google and I think that their search engine is very well positioned, so I see this 30% that Microsoft owns as an opportunity for Google rather than an outright win for Microsoft. But still, what a pain in the ass for Google. * This is the US search share that I'm using for a proxy value. I couldn't find the international split. http://www.comscore.com/Press_Events/Press_Releases/2011/4/comScore_Releases_March_2011_U.S._Search_Engine_Rankings Link to comment Share on other sites More sharing options...
S2S Posted May 8, 2011 Share Posted May 8, 2011 One could argue that by investing in search, Microsoft deprives Google of 30* $321mm = $9.6bn of revenue per year. That alone is worth the entry fee of $2bn/year. I'm afraid your argument, elegant as it might be, is neither correct (see shalab's post above mine) nor relevant. Why? Revenue doesn't always translate to accounting profit, much less shareholder value. Say tomorrow after a drinking binge I decide to open a gas station across the street from an existing Shell, except my price would always be $1/gallon lower. Would I disrupt the market and gain shares? You bet. Would I be able to not lose my shirt after a few months? I'm not so sure. Link to comment Share on other sites More sharing options...
Guest VAL9000 Posted May 8, 2011 Share Posted May 8, 2011 One could argue that by investing in search, Microsoft deprives Google of 30* $321mm = $9.6bn of revenue per year. That alone is worth the entry fee of $2bn/year. I'm afraid your argument, elegant as it might be, is neither correct (see shalab's post above mine) nor relevant. Why? Revenue doesn't always translate to accounting profit, much less shareholder value. Say tomorrow after a drinking binge I decide to open a gas station across the street from an existing Shell, except my price would always be $1/gallon lower. Would I disrupt the market and gain shares? You bet. Would I be able to not lose my shirt after a few months? I'm not so sure. Alright guys, tell me what you think the remaining 30% of the search market is worth to Google. Less than the $2bn that Microsoft pays to keep it? I think remaining 30% is worth MORE to Google than the baseline calculation I presented below, but it's a pretty complicated explanation. I'll get to it if we can't settle on something simpler and more correct. BTW, $20.9bn is the trailing year's revenue for search ads only - display and content are stripped out of this number. Link to comment Share on other sites More sharing options...
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