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Microsoft makes the Magic Formula!


beerbaron
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If you look at their ROE it's quite honorable. There are been some talks about their capital allocation skills but I think they deserve credit. They invested their money pretty well. Gates still has enough shares to stop anything stupid.

 

It looks like IBM in 1993, every started to think about it as an old firm without any future... 80% stock price appreciation within 1 year.

 

BeerBaron

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I think they have done a good job but would have blown a chunk of money / stock buying Yahoo if Yang wasnt such an idiot.

 

While Google and Apple chip away at the consumer biz of Microsoft, I think Microsoft has enormous potential in enterprise computing. Their moat is very deep there and expensive ERP/ custom enterprise solutions are begging to get kicked out. Some of the worst capital allocation decisions of our generation take place in that space. Microsoft is uniquely positioned to go after this lucrative segment. That is pure gravy for them.

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I agree but I dont think thats the focus. For a decade or two MSFT was tech, it was where the best and the brightest went, and everyone wondered what they would do next. Will they become corporate business men who are focused on draining cash from viable businesses and ROIC (IBM), some how I doubt it. I think Balmer has alot to prove and dont see them giving up so easy.

 

Similar to Yahoo, I think they want to be hip and desired. People literally love Apple and Google and want to know whats next. MSFT is more like the phone service or SAP. You hate them, literally but its the only option and the switching costs are too high so you muddle through.

 

That has to suck on some personal level and I think Management will aim to turn it around. They will continue trying to buy their way into Search, Mobile, Cloud Computing, Social Networks, and what ever else is cool / trendy. I would own at least 10% of MSFT (portfolio wise), but I dont think they are focused on making cash. Instead I think they want to reclaim the cool, innovative mantle.

 

This is all one mans rant, and perhaps I am projecting something that isnt there (maybe its more how I feel, and Bill and Balmer really dont care), but if you want a tech company with ton of cash, great FCF yield, focused on ROIC, I would and have done WDC. They arent building an empire. Just cashing checks, banking stock options, and going home. Exactly what I want my Management team to be doing.

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If you look at their ROE it's quite honorable. There are been some talks about their capital allocation skills but I think they deserve credit. They invested their money pretty well. Gates still has enough shares to stop anything stupid.

 

It looks like IBM in 1993, every started to think about it as an old firm without any future... 80% stock price appreciation within 1 year.

 

BeerBaron

 

For fun, I decided to look back at IBM vs the s&p 500. According to Morningstar, the stock has underperformed the market since 01/31/1962 by a huge margin. Anyone else realize that? Click on "compare" and then in the benchmark click on the s&p500.

 

http://quote.morningstar.com/stock/chart.aspx?t=IBM&region=USA&culture=en-US

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I actually did something very strange (for me).  I bought and sold MSFT last month for a tidy little profit.  It looked (and still looks?) like it's finally priced at a level that can be justified by their cashflow and the business environment risk that they face.  I bought a 5% position, and the price promptly shot up by 5%.  I said, "What the hell, I've got a profit on the table, and I hate this security, so might as well take the profit."  Total holding period was only about two weeks.

 

I'm happy to have made a few bucks, but I never really did like holding a security that has such an uncertain future.  I like to mentally buy with the idea that I'll hold something for 10 years.....MSFT could be like Lotus in 10 years!

 

 

SJ

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MSFT could be like Lotus in 10 years!

It is comments like these without numbers to back it up that is driving the stock price. While the mind share is taken up by the likes of Google, Facebook and Apple, Microsoft continues to increase cash flow and profits.

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If you look at their ROE it's quite honorable. There are been some talks about their capital allocation skills but I think they deserve credit. They invested their money pretty well. Gates still has enough shares to stop anything stupid.

 

It looks like IBM in 1993, every started to think about it as an old firm without any future... 80% stock price appreciation within 1 year.

 

BeerBaron

 

For fun, I decided to look back at IBM vs the s&p 500. According to Morningstar, the stock has underperformed the market since 01/31/1962 by a huge margin. Anyone else realize that? Click on "compare" and then in the benchmark click on the s&p500.

 

http://quote.morningstar.com/stock/chart.aspx?t=IBM&region=USA&culture=en-US

 

Of course, that shows to show that great stock could or could not be great investments. It just depends on your entry point.

 

BeerBaron

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Honestly you dont need numbers. He is saying they could lose their dominate position. This wont show up in the numbers until it happens. Lotus had great numbers until they didnt.

 

I would argue its very easy for them to increase cash flows and profits by cutting R&D and closing all the unprofitable business units. Then the numbers would look great for a while but the future would be mortgaged.

 

The moat is clearly under attack, you have to look at things qualitatively. INMO they have but 1 deep wall left. Thats the Corporate space with regard to Windows and Office.

 

With netbooks and smartphones people will open up to other operating systems. People are used to Android and Apple. People will begin to use tablet Apple OS, and Android, then they will open up to the desktop space. Open Office and Google Docs are getting better each day.

 

The last shoe to drop is Corporate, which drives home users, and schools. If Corporations open up then whats really left to justify the market cap.

 

MSFT is cheap, has a monopoly, and an ok Moat, but its foolish to think they are guaranteed to always be around in the PC space, or that they are for sure to be around in the same capacity in 2020 / 2025. Big blue probably had great cash flows and profits for a while while Apple and Microsoft dominated the "mindshare" With that said I think investors now will make money.

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MSFT is cheap, has a monopoly, and an ok Moat, but its foolish to think they are guaranteed to always be around in the PC space, or that they are for sure to be around in the same capacity in 2020 / 2025. Big blue probably had great cash flows and profits for a while while Apple and Microsoft dominated the "mindshare" With that said I think investors now will make money.

 

Microsoft will be around in 2020/2025 but you are right, it may not be in the same capacity. Microsoft's US market share has dropped a bit to 89% but world wide, it still commands 94% of the market. Microsoft has lost 6% market share in the US to Apple in ten years. Even at an accelerated pace, don't see Microsoft going out of business by 2020.

 

The PC market is still expanding at a healthy double digit pace world wide. Also, Microsoft is reducing bloat and there is room to cut more fat.

 

The only way I'd become interested in Microsoft again is if Gates returns as CEO

 

Nothing is going to change if Gate returns.

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I think the threat is not from Apple.

 

A usable Linux is the ultimate threat. Cheap devices which are basically web portals, ebook readers, and dvd players. Linux is no longer nerdy and weird. People are now developing it to be usable and users are now becoming more open to non Microsoft devices and portals. Mac OS and Android are based on Linux  I believe.

 

Android is a big hit, Google will continue to basically give away products that MSFT makes money on. That sucks. You make something and people use it. Your major competitor comes in and designs something just as good and gives it away from free. MSFT OS for Phone, MSFT Tablet OS, both will be non starters due to Android. They may exist, but not at a dominating 50% plus market share. Search is slightly protected for Google so they can continue to develop and give away free products. People are also having less and less of a reason to buy Office with Open Office and Google Docs.

 

Big business is the last refuge, and I dont know how you break the Dell / HP / Microsoft / Intel cabal when it comes to businesses. We still use XP and all machines come preshipped with MSFT at work. It will be interesting to see if or what breaks this trend. Currently I cant think of anything. But companies are having to adapt IPhones because business leaders are demanding it and they make the decisions. My CFO has one and we are opening up to it at an S&P 500 company.

 

What happens when the CFO uses Mac Products, Open Office, an Android Tablet PC, and various other things at home everyday.

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MSFT could be like Lotus in 10 years!

It is comments like these without numbers to back it up that is driving the stock price. While the mind share is taken up by the likes of Google, Facebook and Apple, Microsoft continues to increase cash flow and profits.

 

 

It's not a question of numbers.  It's a question of technology and consumer preferences.  We have seen software companies dominate a particular domain for a number of years and then disappear completely.  I mentioned Lotus 123, but there's also WordPerfect, DBase and others.  

 

For my home use, I no longer use MSFT products on a day to day basis.  I run Linux, Open Office and Chrome very happily, and I supplement this with GoogleDocs for the convenience of always being able to access my spreadsheets from anywhere.  Frankly, the functional capabilities of OpenOffice are very similar to Excel and Word.  I notice the difference only on some of the more obscure data handling and modelling stuff, but even that is minimal.  I will never again pay for an OS or office app.  It's not because I'm a MS hater, but simply because the free stuff has gotten that good, and I am a cheap bastard cautious with my money.

 

So there are a number of broad outcomes for MS over the next 10-ish years.  Here are a few to consider:

 

1) MS continues to dominate OS and Office domains, PLUS they innovate and find some other growth avenue.

2) MS continues to dominate OS and Office domains, but they fail to innovate.

3) MS's dominance in OS and Office slowly erodes, but this is offset by increasing market size (ie more installed users around the world)

4) MS's dominance is OS and Office quickly erodes, in fact so quick that it is not offset by increasing market size

 

 

MS's historical financial performance has been driven with #1 type of growth.  I would argue that the past few years have been typified by #2 type of growth (ie, they maintain 9X% market penetration of a market that is growing by XX%).  So where are we headed next?  Will it continue to be #2 type of growth for the next 10 years or will it be #3 (ie, 75% penetration of a market that is 150% as large as today) or will it be #4 (ie, 40% penetration of a market that is 150% as large as today)?  I can't tell you which of the four states of nature will prevail.  But I can tell you that, at today's price, if #1 or #2 occur, you'll probably make out like a bandit.  If #3 occurs, you'll probably just do ok over 10 years by holding MSFT.  But if it's #4, you might have a permanent loss of capital.

 

Smarter people than me try to assign probabilities to the various states of nature that could occur (there are many more than the four that I listed, but I like my four because they're simple and broad).  I just have a little discomfort with MSFT because I know that #4 has already happened to WordPerfect and Lotus (and others).  There is some potential for a permanent loss of capital, and I'm not sure how to assess the likelihood of this.

 

 

SJ

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StubbleJumper you sound like me. I got MSFT OS for free via a developers conference and a $10 copy of office 2010 via work. Where it not for this I would probably just use other options. When I get my Netbook the first thing I plan on doing is running Linux mint.

 

I actually dont bootleg much software these days because the free options really are as good and it beats dealing with all the DRM type stuff.  I know I am a nerd and a cheap bastard, which makes me a bad sample. But the masses are catching on. My bother is Maced out, and everyone else just wants to get on the net and doesnt really care too much how it happens.

 

Once you have used an Android phone, an Android tablet isnt too much of a stretch. Whats next is an Android OS for your Netbook, and then you move the Desktop over and thats that. Mac has done the same with their suite of OSes.

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You can't blame a CEO, such as Ballmer, that increases cash, profits, sales etc. but the stock price doesn't increase over the years because the P/E started way too high.

 

Alas - what you can criticize a moron like Ballmer in taking all those cash profits etc. and shoving it back into a crappy buyback.  How much cash reinvested into an overpriced asset over the last 10 years?  $50B?  $70B?  $100B?

 

Most people enjoy buybacks without focus on share price.  I equate that to not caring whether you bend over to pick up the soap in your own house or bending over to pick it up in a corrections facility.  You better know your environment.

 

 

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I'm no Ballmer fan - but hasn't the buyback been primarily the last 4 years - with trailing PE's of 20-12 and forward PEs and cash flow yields even better?  Much of the buyback has been recent (and ongoing) at very attractive yields.  It sure beats buying Yahoo, Facebook or something even worse.

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Global finance - Real quick analysis

 

2003 - 2005  18b

2006 19b

2007 27b

2008 12b

2009 9b

2010 11b

 

Close to $100B.  I wonder what MSFT's market cap would look like if they were buying Apple's stock with all that cash.

 

Interestly enough - 2009 was the lowest level of buyback in recent years as the stock was at its cheapest.

Good timing.

 

I wonder how much Ballmer gets paid to watch Steve Jobs innovate new products (Itunes, a real smart phone, fuctional tablet, easy to use music player, etc.) and try to copy them with crap.

 

 

 

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A few random responses:

 

- Mac OSX is BSD under the hood, not linux, but both linux and *BSD are basically unix. Anybody running anything serious on the net uses unix/linux/bsd servers, this is unlikely to change - Microsoft never cracked the server platforms - you can't run web apps or SAAS on something that needs to be rebooted every other day. And now with BSD on the desktop (via Apple OSX) and *nix in the mobiles and tablets (iphiones, android) - the full spectrum of net connected devices is shifted more toward the same thing the servers run: *nix or *bsd.

(I know, I will draw hatred from the M$ systems types out there for saying this, there are a few)

 

- The comment about Gates coming back or at least a new CEO: bingo. When I think of this and do a rough analogy between situations: Everybody thought Apple was dead and then Jobs returned and refocused them. There is definitely a potential catalyst in there in a regime change.

 

- I think not think the comparisons to Wordperfect, Lotus or dbase are apt, as they were pretty vertical monopolies that were basically nuked by the underlying microsoft monopoly at the the operating system level. I think windows, Vista, whatever they call it, will be around for a long long long time, despite the fact that it's just a god awful operating system that even my 4-year old has grown to view as klunky and torture to use (she much prefers Mac OSX) and on the other end of the scale, used to drive my 80-year mother into near nervous breakdowns. There are no "happy" windows users, just a pretty large locked in userbase, mainly at the workplace, that just suffers and uses it and thinks "this is just what computers are like".

 

So I don't see MSFT "going away" the way wordperfect or lotus did, because there is nothing that can come along at the O/S level and just step in and replace it. Unless everybody switches to Mac, and while they've made huge inroads, I don't see them completely taking over windoze "in the cubicle" (I suppose a good summation would be "as long as there are cubicles, there will be microsoft powered desktops")

 

All just random opinions. I am surprised to see it at these valuations. I can't stand their products.

 

 

 

 

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Most people enjoy buybacks without focus on share price.  I equate that to not caring whether you bend over to pick up the soap in your own house or bending over to pick it up in a corrections facility.  You better know your environment

 

Great line... This thread won't give me an investment idea but it did give me a line I can steal!

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Alas - what you can criticize a moron like Ballmer in taking all those cash profits etc. and shoving it back into a crappy buyback.  How much cash reinvested into an overpriced asset over the last 10 years?  $50B?  $70B?  $100B?

 

I'm sort of swinging back to the buybacks are no worse than dividends mentality.  If buybacks at a high price increase your ownership by 10%, then just sell an offsetting amount of shares to manufacture a dividend for yourself -- given that dividend and capital gains taxes have been identical, you at least save on taxes through the buyback route as you don't pay tax on your cost basis.

 

So you wind up with more money post-tax via the buyback.

 

And who is complaining anyhow about an overvalued stock -- only people who don't own it.  Owners would have sold and become non-owners if they thought the valuations were stupid -- and if they did... they were happy to have a ready buyer.

 

 

 

 

 

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