MSFT

[Guest VAL9000]

tombgrt,

 

There doesn't seem to be much doubt that MSFT's core businesses have great earnings power.. and even some non-core assets are doing pretty well.  What I'm trying to figure out through all of these conversations we're having is whether or not Microsoft is going to pivot to a company that is relevant for the next 30 years.  They have a huge lead, but we've seen this squandered in the past.  Especially in tech.  Prognosticating over the future of Microsoft and the tech world in general kinda comes with the territory.

 

Microsoft's "base case" is a compelling one... but I can't allow myself to invest with them unless I am convinced that they will successfully navigate their way through the current shift in computing paradigm.  Hence all the bullshit :)

 

[Myth465]

30 years is an eternity in tech. I cant think of 1 tech company that is going to be around till then. I think Buffett has the right idea, buy chewing gum, utilities, and railroads (im not totally sure on this one) if you want some sort of promise of longevity.

[sswan11]

Well, IBM might still be around.  It's made it this far (since early 1900s).  Is Microsoft the "new IBM", a huge computer company relying increasingly on corporate sales?

[Viking]

MSFT looks to be in the midst of its greatest new product cycle in recent memory. They also look to be poised to compete very well in the 'cloud'; further, their deal with Nokia looks to only have upside. The bottom line is over the past year the 'story' has gotten better and the stock has gotten much cheaper than it was a year ago (when I started this post), especially for a Canadian investor. Here is a recent (long) Q&A with their CFO: www.microsoft.com/investor/Downloads/Events/MorganStanley_Peter_Klein_030211.docx  

 

Here is a comparison of what I posted a year ago and how things look today... solid outperformance!

 

           May 27, 2010        May 13, 2011

Price =     $26.00                  $25.03

 

                           May 27, 2010 Est        May 13, 2011

2010 Earnings Est = $2.05 to $2.10        Actual = $2.11

2011 Earnings Est      = $2.20                New Est = $2.63  

Dividend                  = $0.52 = 2%        New Div = $0.64 = 2.6%

Cash on hand        = $5.00 per share       Same with aggressive share repurchases

Can$                          = $0.95                 $1.03

 

 

[sswan11]

I don't know if someone already posted this Fox Business interview which negatively views Skype purchase:

 

http://video.foxbusiness.com/v/4693790/growing-pressure-facing-blankfein-at-goldman/?playlist_id=87062&source=TheMotleyFool#/v/4687438/skype-deal-a-disaster-for-microsoft/?playlist_id=87062  (sorry, didn't clean up the URL)

[goldfinger]

MSFT looks to be in the midst of its greatest new product cycle in recent memory. They also look to be poised to compete very well in the 'cloud'; further, their deal with Nokia looks to only have upside. The bottom line is over the past year the 'story' has gotten better and the stock has gotten much cheaper than it was a year ago (when I started this post), especially for a Canadian investor. Here is a recent (long) Q&A with their CFO: www.microsoft.com/investor/Downloads/Events/MorganStanley_Peter_Klein_030211.docx 

 

Here is a comparison of what I posted a year ago and how things look today... solid outperformance!

 

A lot of what you are saying makes sense!

[Cardboard]

While I am getting quite interested in these big tech stocks with very attractive P/E's once you back out the cash, this take-over is just a warning sign that this cash is not yours.

 

All these companies: MSFT, GOOG, AAPL, DELL, CSCO and others appear to be retaining cash in such amounts because they are worried about their existing business and want big hoards of cash handy to buy the latest technology (without Street questioning or restriction) if they miss the boat. I can't come up with any better explanation since they all generate large free cash flows giving them full access to very attractive credit terms.

 

So it is a double edge sword. It gives you protection for survival and as an asset, but there is quite a chance that the Street will discount this asset to $0 if the behaviour remain as such. P/E and PEG are then likely better valuation tools since no one will take them over (very unlikely) to realize that cash value. They are still priced very low for such powerful and profitable firms.

 

Cardboard

[Guest VAL9000]

Myth, I used 30 years because that is roughly how long the PC paradigm of computing has lasted.  Mobile and cloud lasting 30 years is a good a guess as any.  What's interesting is that if you look at the companies in tech that have been around for 30 years or longer..  well it's a pretty good match up with the tech companies we're talking about on this board today: MSFT, HPQ, INTC, AAPL.

 

The other thing that I'd keep in mind is that even if you invest outside of tech, you might still be exposed to tech (and not on the good side).  Book retailing, newspapers and the record industry are three great examples from the past 15 years.

 

The examples you named require some imagination to put in jeopardy, but:

1 Utilities - Will the rise of solar/wind power reshape the power generation landscape?  If capital requirements for generating power drop significantly with this tech, utilities could shift away from their natural monopolies and towards a more competitive situation.  This has potential to kill the profits.

2 Railroads - The big advantage over trucking is that they are cheaper for long-haul routes.  Much of that cost savings is derived from fuel efficiency.  If electricity becomes an order of magnitude cheaper (see 1), and trucks adopt electric engines...  the economics of railroads aren't nearly as good.

3 Chewing gum - I tried but I couldn't come up with anything that looked more like science than science fiction.  The sci-fi version: 3D printers are getting pretty good.  Could you print your own chewing gum?  Custom flavours and sizes?

 

With a time horizon of 30 years, I consider all three scenarios above possible, and in some ways probable.

[DCG]

MSFT looks to be in the midst of its greatest new product cycle in recent memory. They also look to be poised to compete very well in the 'cloud';

 

 

What great new products do they have coming up? They're product strategy seems to be to wait for Apple and Google to to release products, then wait a year or two and release an inferior product.

 

-And they're not really 'in the cloud' as much as their advertisements try to claim.

 

I still don't understand how any shareholder could be happy with Steve Balmer running this company.

[Guest VAL9000]

All these companies: MSFT, GOOG, AAPL, DELL, CSCO and others appear to be retaining cash in such amounts because they are worried about their existing business and want big hoards of cash handy to buy the latest technology (without Street questioning or restriction) if they miss the boat.

 

Cardboard,

 

I couldn't agree with you more on this observation.  The cash isn't yours, but it's a necessary requirement if the horse you're backing expects to make it through the next leg of the race.  Innovation as a process is such a hard thing to do well.  It's so much more reliable to let the tech ecosystem evolve organically and then just buy the winners.  Of course, if these winners want a shot at the crown (think GOOG v. MSFT circa 2003), then co's need to come up with other responses (think Facebook v. GOOG re: social networking, or GOOG v. MSFT re: search).

 

[S2S]

MSFT looks to be in the midst of its greatest new product cycle in recent memory.

 

Any number of professional analysts or other so called experts have made claims to this effect far too many times over the year. As time progresses and stock prices ebb and flow, some are proven "right", others not as fortunate... But personally I wouldn't go long MSFT on that statement alone.  ;D

[Viking]

Products the company has recently launched: Windows 7, Office 2010, Server R2, Kinect, Bing, Azure cloud, Windows 7 mobile. These launches are not pipe dreams; they are in the marketplace and most actually have exceeded performance expectations and will drive increased profitability in the near term. Looks pretty impressive to me.

 

Regarding the cash, yes, I also struggle with how to value it. What I do like with MSFT is they do pay a decent (growing) dividend and also do meaningful buybacks every year (reducing share count) = 5 or 6% per year.

[Guest VAL9000]

-And they're not really 'in the cloud' as much as their advertisements try to claim.

 

DCG, not sure how you measure and compare this, but I think MSFT has done a good job of migrating towards cloud-based architecture and offerings.  If we break it down by business line, the achievements look something like this:

 

- Windows & Windows Live Division - Not much to comment on here.  By its nature, the OS somewhat precludes cloud-related activity.  Maybe WP7 counts as part of this group, or maybe it's part of entertainment and devices.

- Server and Tools - Azure as a server and dev platform is pretty advanced.  They just released tools to easily connect WP7, iOS, and Android devices to the Azure platform.  This is a big deal for devs.

- Online Services Division - Cloud by its nature, we know all about where they're at here :P

- Microsoft Business Division - Office 365, obvious cloud move.  Plus SharePoint, Exchange, Lync, etc are all becoming Microsoft-run services on top of being in-house servers.

- Entertainment and Devices Division - Xbox Live and downloadable content.  Xbox live has 30 mm subscribers and at $50/year that's about $1.5bn/year in cloud services.

[ERICOPOLY]

- Windows & Windows Live Division - Not much to comment on here.  By its nature, the OS somewhat precludes cloud-related activity.  Maybe WP7 counts as part of this group, or maybe it's part of entertainment and devices.

 

What if your per-user purchased software licenses and per-user settings were mirrored in "the cloud"?  HKEY-Current-User (or an improved analogue of it) follows you wherever you go.

 

How about at least some of your files being mirrored in "the cloud"?  You simply take a folder on your computer that you wish to have mirrored, and tag it with a property to have it mirrored?

 

How much can they charge users for such a service?

 

Or think of something like "MobileMe", but for Windows.

 

There are revenue opportunities here -- more than you get from just selling Windows licenses.

[Guest VAL9000]

Eric, those are really cool ideas :)  I think Groove was moving in that arena (more for collaboration), so much of the tech exists.

 

DropBox is a startup that does a similar thing with respect to files.  This could be another MSFT acquisition in the future.

 

These services would almost certainly have to be freemium.  Free for the first 25gb, pay for the next 100gb or something to that effect.

 

I might also argue that the idea of local files could just go away, or become secondary to the idea of cloud-based storage.

[S2S]

ERICOPOLY,

 

Agreed. I plan to keep a close eye on whether Google gains traction with its new pay-$30-per-user-per-month-and-throw-away-the-key model.

http://www.engadget.com/2011/05/11/editorial-google-clarifies-chromebook-subscriptions-might-have/

[Guest VAL9000]

S2S: Smart thinking on the Chromebook analogy to Eric's thoughts.  I'll be paying attention, too.

[DCG]

- Windows & Windows Live Division - Not much to comment on here.  By its nature, the OS somewhat precludes cloud-related activity.  Maybe WP7 counts as part of this group, or maybe it's part of entertainment and devices.

 

What if your per-user purchased software licenses and per-user settings were mirrored in "the cloud"?  HKEY-Current-User (or an improved analogue of it) follows you wherever you go.

 

How about at least some of your files being mirrored in "the cloud"?  You simply take a folder on your computer that you wish to have mirrored, and tag it with a property to have it mirrored?

 

How much can they charge users for such a service?

 

Or think of something like "MobileMe", but for Windows.

 

There are revenue opportunities here -- more than you get from just selling Windows licenses.

 

Or you can just use Google Docs for free, or for only $50/year per user for businesses of any size.

[ERICOPOLY]

Eric, those are really cool ideas :) 

 

Mobile Me costs $99 per year.

 

Microsoft gets $0 presently (no such service yet).

 

So is Windows a mature business that has no growth potential?  Perhaps, but perhaps that's just a shell game because the revenue growth will happen in the "online services" division.

[Guest VAL9000]

VAL - question for you. Are you employed at MSFT.

Ha ha ha - no.  And I'm not (yet) long MSFT either in case I'm coming off as a little too pro Microsoft.  I work in tech and spend an inordinate amount of time learning about the business.

 

Why do you ask?

 

[DCG]

& as everything moves 'to the cloud' why will people/businesses need to keep paying for Windows? You can use MS Office online. There will be less of a need for people to buy Microsoft's crappy operating system.  :P They can grow in their online services, but there are other companies out there providing similar services, often for free.

 

I'm not saying there won't still be demand for their products - I just think it will get to the point in the not to distant future where businesses won't need to rely on Microsoft's products and operating system.

[Valuebo]

ERICOPOLY,

 

Agreed. I plan to keep a close eye on whether Google gains traction with its new pay-$30-per-user-per-month-and-throw-away-the-key model.

http://www.engadget.com/2011/05/11/editorial-google-clarifies-chromebook-subscriptions-might-have/

 

paying $30*36 ($1080) for a 12" notebook which doesn't let you install your own applications (big businesses anyone?), asks for a new investment in educating your personnel, ... What am I missing?

[ERICOPOLY]

You can use MS Office online. There will be less of a need for people to buy Microsoft's crappy operating system.  :P

 

I can't remember a time when you needed Windows operating systems to run Office.  In fact, I just ordered (yesterday) an iMac for my wife (configured with MS Office pre-loaded).

 

What else (it's not MS Office) has driven corporations to upgrade to Windows 7 desktops instead of to Mac desktops?

 

[prunes]

I'd like to go back to the topic of Google vs. Microsoft. With the increasing talk of anticompetitive practices at Google, Microsoft in my opinion stands to be the primary beneficiary of any action taken by the US or European governments. Additionally, someone in this thread had likened Google to Coke. I don't think there is any comparison between the durable competitive advantage of the Coca-Cola brand to Google. I'm sure many of you have read Munger's speech where he dissects the key factors that have made Coke such a success, the most important of which IMO are the ideas that Coke conjures in the minds of consumers. Google doesn't have this. At the end of the day, search is a commodity, and the traffic is going to travel along the path of least resistance. Sure, Google has tried to take the Coke approach in certain regards--think about why Google has its Google doodles, etc. But think about this: What does Coca-Cola mean to you? What does McDonalds mean to you? What does Google mean to you?

[ERICOPOLY]

What does Coca-Cola mean to you? What does McDonalds mean to you? What does Google mean to you?

 

Going back to a discussion we had on this board in January, Coca-Cola means "big tobacco" to me now.

 

Their past growth benefitted from a world in which the sources of a growing epidemic of metabolic syndrome had yet to be understood.

 

Will people be willing to consume 64 ounce Cokes thirty years from now?  

 

How many board members smoke a pack a day?  Smoke even once a week?  What would have been the percentage 30 or 40 years ago?

 

Fear not investors, you have made a lot of money as the merchants of death, despite the drop-off of smokers in the USA.  Rest assured, you will continue to send a lot of Coke drinkers to an early grave and the opportunity to continue doing so well out into the future exists.  It is a "wonderful" business.