Microsoft stock unloved, seriously undervalued

September 6, 2010 | By Surur

Microsoft seriously undervalued We don’t have to tell our readers that sentiment in general is against Microsoft, especially when it comes to smartphones, which are often seen as the computers of the future.

This has had a radical effect on Microsoft’s valuation, seemingly depressing the stock to incredibly low levels when taking into account the company’s massive earnings.

As Morgan Housel at Motley Fool writes, this makes the shares looks cheap. Really cheap. The company is currently trading at less than 10 times its yearly earnings, which is less than even HP and half of what Apple is running at.

Morgan says:

But lost in this overly simplistic comparison is a simple truth: Microsoft is outrageously profitable, its balance sheet is bulletproof, and its stock trades at a valuation that makes sense in only the most offensively cynical scenarios.

Here you have a $25 stock, with 17% of that value made up of cash in the bank. Back out the cash just sitting there collecting dust, and you get an enterprise value of about $20.75 per share. Simple math: That’s 11 times trailing earnings, which is perfectly insane given how low interest rates are.

And what do you get for this unloved stock? A company that still commands more than 90% market share. A company with a near monopoly, where both consumers and corporations realistically have to use Microsoft Office to remain relevant. By any stretch, a company with one of the most powerful moats in the world.

Of course Microsoft’s low valuation is justified by prevailing sentiment that the company will not be growing in the future, based on its perceived lack of consumer success.

This of course ignores the skill the company has on the business side. As Microsoft Frank Shaw said:

“So in 10 years we’ve grown eight new billion-dollar businesses,” Shaw said, adding that it “shows what we’re capable of doing.

The businesses are:

Xbox
SQL Server
System Center
Unified Communications (Exchange)
SharePoint
Developer Tools (Visual Studio)
Dynamics (ERP & CRM)
Online Advertising (display & search)

Now at WMPoweruser.com we are not financial analysts, but of course they are at Motley Fool, and Housel notes:

The world’s best investors, most notably Warren Buffett, have made their fortunes scooping up unloved companies the market has written off. Charlie Munger, Berkshire Hathaway’s other co-chairman, advises that “You’re likely to be happier and gain felicity by aiming low.” Microsoft shareholders are currently aiming low. Happy future returns seem like a good bet.

Now imagine what will happen to the share price of Windows Phone 7 is successful….

Do our readers think Microsoft is a good buy at the moment? Let us know below.

About Surur

Site Admin and Windows Phone enthusiast, he has been using Windows Mobile devices since before they were called PocketPC’s. He is currently sporting a HTC 7 Trophy.

Tagged microsoft

efjay

Problem is so many people DONT want WP7 to be successful and will do anything to make it fail, with biased reviews or blog articles. Somehow, just as with the iphone people have been brainwashed into thinking that only apple and google have a right to be in the Smartphone world, and they will do everything to try and paint WP7 in as bad a light as they can. Microsoft of course has not helped their cause by omitting key functionality thus providing their detractors with easy ammunition.

OOOO

good comment, however the key things is microsoft has to add functions like multitasking with extreme caution. multitasking on android has been a HUGE battery hog. WP7 battery life is a priority for them, they make sure most of the display has black so the OLED screens dont need to fire those pixels, etc. little things like that…. 1st party apps can multitask, and those apps are probably optimized for it. anyways who needs to multitask on a phone, we have a back button thats enough for now, we dont need to hold the home key for 10 seconds then click an open app, i dont see how thats a solution to anything

Melika

People make too much of the lack of multi-tasking in wp7. When programs are done correctly, and thanks to MS's efforts in reviewing submitted code, the consumer will not know the difference. You can argue that Pandora will not work, but with 10GB of disk space to save ur music who even needs Pandora really?

The problem, I think, is in the lack of a proper task-switcher rather than multi-tasking. I read an article about how, once you are in IE, you will have to go all the way back in your browsing history until you can go back to the previous application.

As for the MS stock price, it is hella cheap. I have the majority of my 401k in MS right now.

OOOO

windows phone 7 will be successful. microsoft employs the best advertising agencies in the world to help them, something google and apple do not do (too expensive for them). I would agree with you, that microsoft is very underrated and itll be a big suprise to wall street when the first sales numbers come in about windows phone 7.

Fedro Spencer

So I think Microsoft shall have used those advertising agencies a very long time ago… At the time WM6.5 was the only OS on the smartphone market. MS was on the market far before Apple and Google and almost no one knew it. Of course they did nothing to promote WM6 and therefore they totally lost the customers. Now the damage is done and it is terrible.

Many people do not even know that MS is in the smartphone business ! e.g. Many people see my HD2 and ask me if I'm "satisfied with my iPhone" !

Now Apple and Google are very successful. So, seriously, why MS did not use these advertising companies far before if they have so much money?
Jos Dewey

That is gold… how far up your anus is your head stuck mate?

Apple can go to hell, they put out shit products and have brainwashed a whole generation of kids into thinking anything else is simply unacceptable.

But come on, Microsoft have better advertising guys than Apple? Yeah, the Windows XP campaign with that lame Madonna song is so much more memorable than Apple's marketing campaigns.

Yeah, right.

Marty

I am not a stock analyst but I believe that Microsoft needs to do a huge reverse stock split. There is so much shares outstanding (8.5B) that there is over supply. Compare this with the numbers for AAPL (913M) and GOOG (317M). They need to drastically reduce the supply

GP007

They've done stock buybacks before, I think the last time was back in 2007 or 2008 maybe. A reverse split is pretty drastic though, but you never know if they want to, simply buying outstanding shares that are floating out there little by little might be the better option.
Melika

The point is not to make the stock price hit $1000/share. The point is in making the PE ratio equitable to similar tech companies. Doing a reverse split will not change the fact that people are not paying more than about 11x earnings now. People need to believe in the MS story.

Marty

The reverse stock split is not a guarantee wrt stock price. In fact the act in itself doesn't change anything. A 5:1 split of a $25 stock will result in a $125 price for each stock which is really no difference from today. Matter of fact, the stock may start sliding backwards, resulting in further loss for the stock holder. Still the outstanding shares will be reduced to 1.6 billion which is not the best but a huge improvement from the current >8.5 billion.
Marty

People believing in Microsoft story is a myth. Wall street bases the value of tech stocks on sexiness and the metrics for sexiness is purely judgemental. Microsoft was once sexy and benefitted immensely turning Gates to the richest man on earth. Google is slipping on it's sexiness while Apple is the ultimate tech sex symbol for wall street. So with Microsoft's near monopolistic dominance on client and server OS, productivity tools, etc and the oodles of cash it makes and has, the stock price has not seen any reflection of these. Microsoft is an old dried up "bitch", and even the potential dominance in cloud OS (with Azure) and the reemergence of it's mobile division will not change much.

Microsoft must find the equivalent of breast implants. I don't know what that is.

P. Douglas

MS needs to continually rehabilitate its image with ads. It needs to brings its message directly to consumers and investors – and not rely on haters to do it for it. I also think it would be helpful if MS used a caricature of its haters in its ads – kind of like those two old guys from the Muppet Show. E.g. you MS have a lady coming from a MS store with a WP7, happy and satisfied, with these two Muppets in the background shouting "MS sucks!", then a few seconds later, they get run over by a bus. (Needless to say, it is important that this is done tastefully.)

http://wmpoweruser.com wmpoweruser

I love this idea
Melika

Haha, dude that would be awesome. I always thought that MS missed an opportunity to respond to those dumb, albeit funny, Mac vs PC ads.

brianchau

I think it is safe to buy MS stocks. Even if WP7 phone fails, it probably do much damage to the share price as the current share price pretty much assume WP7 will fail. On the other hand if WP7 does succeed, then the share price will go up no doubt.
http://tomasvaril.com Tomas

I think that Steve Balmer is not such a marketing manager like Bill Gates was Apple can sell almost everything in the way that every customer is convinced that his new peace of paper for 1000 bucks is piece of kinda untouchable gold. And that is their advantage. I always understood Apple and Microsoft like companies which were aiming to different field of market. Apple for me is synonym to Life Style, Microsoft is synonym to productivity. So thus I feel doubtful about Microsofts experiment to get in the life style field of market where they have no experiences at all. Few days ago I was trying MeeGo on my netbook and I think this is the way, the mobile OS should aim to, I really like the concept.

At the end: http://www.sadanduseless.com/2010/05/steve-jobs-v… this one is great…
michal from poland:)

In my small opinion you guys have in mind only us and uk markets which are big, but do not forget about eastern europe middle and far east.i come from poland and i dont know anyone who would use mac os.everybody uses windowsxp<vista was crap> and now everybody are switching to windows 7 but in those countries it will take longer than in us or uk.in eastern europe more populars are phones like nokia, mp3 players…not many use ipods. more prefere to have cheaper ones.remember that people in that part of world are earning from 300-1000 usd a month.as long as apple products are so expensive nobody uses them.windows is sold much cheaper beacouse you can buy it as oem for 50 usd,and you can buy pc with oem windows cheaper than mac computer,as in those markets are many people that can build computer from parts.and mac computers with os comes from apple factory and are more expensive.look for china for example. they can buy mac for 500 or 600 usd with mac os or they can use parts that are already manufactured there andhave a good computer for 250 usd and buy with oem windows for another 60 usd.
just to note windows7 is cheaper in countries where people dont earn as much as in us.its the same with istore….do you think that many people can affordpaying 20 usd a month for 40 songs if they earn 100usd a month???so they prefer to buy mp3 player that accept pirate copies of mp3 and is simpler to use.that is why i thing ms will continue to growth over time as us market is full and new markets arevital for the future…1.4 billion people in china and more tham 1 billion people in india….thats 10 times bigger market than us in next 20 years or so.and microsoft software is available for every computer.mac is harder to get and more difficult for people in those countries to repair, as it is more expensive.think of that