Microsoft (MSFT) seems to be one of those "hate it or love it" stocks. Many assume that declining PC sales, a lack of mobile presence, and poor past performance will continue to drag the company down into irrelevance. Others see value. I'm part of the latter crowd.
Digging into the declining PC sales
IDC is predicting the worst ever dip in PC sales this year. Jay Chou of IDC explained that
"While IDC research finds that the PC still remains the primary computing device-for example, PCs are used more hours per day than tablets or phones-PC usage is nonetheless declining each year as more devices become available. And despite industry efforts, PC usage has not moved significantly beyond consumption and productivity tasks to differentiate PCs from other devices. As a result, PC lifespans continue to increase, thereby limiting market growth."
Windows is by far the leading operating system for PCs. One thing that should be pointed out about IDC's numbers, however, is that they do not include the 2-in-1 devices (like the Surface) that are increasingly being pushed by Microsoft and its OEM partners.
Is it really that bad?
It doesn't seem realistic to say that one day all business will be done on a smartphone. I'm also assuming it's hard for a student to write up an entire term paper on a tablet. Declining is different than dying. As pointed out by Preston Gralla of Computerworld, "IDC estimates that approximately 300 million PCs will continue to sell each year well into the future. Although that's not a growing market, it is a stable one."
In its most recent quarter, or Q1 of 2014, the company felt the effects of declining Windows sales-- which fell 7%-- but in the grand scheme of things it didn't really matter much. Microsoft reported a 17% increase in net income and grew revenue by 16% year-over-year. Pretty impressive quarter, right? This came about a month after the company announced a whopping $40 billion buyback, coupled with a generous 22% dividend increase.
Looking past just PCs and Windows
Pushing past Windows and the whole "dying PC" thing, Microsoft has some exciting and growing businesses that are strategically placed for success going forward-- PC or not.
Besides slumping Windows sales, its other businesses looked much better as far as growth goes. The Surface made about $400 million in sales this quarter, which might not be great, but it's much better than last quarter's $900 million write-down. Cutting prices also contributed to this, however.
Bing search ad revenue increased by 47%. Commercial revenue grew 10%, with Exchange, Lync, and SharePoint each seeing double-digit growth. As noted by PC Mag, Microsoft changed how it reports this quarter (due to its reorganization), so as a comparable to the old way of reporting segments, it also provided that data, too. Under the old way of reporting segments, the Windows division, Business division, and Entertainment and Devices division all enjoyed growing revenues year-over-year.
The company is also more diverse than many assume. Microsoft has over a dozen $1 billion businesses. These include not only Windows and Office, but also Xbox, SQL Server; System Center; Unified Communications; SharePoint; Developer Tools; Dynamics (ERP & CRM); and Online display and search advertising.
Transforming the old into the new
Microsoft is looking to protect old moats, as well as establish new ones. Office has been transformed into Office 365, which is now offered as a subscription service, as well as with cloud integration. This new version reached a $1.5 billion annual revenue run rate by July of this year (the company's Q4 of 2013), which was up half-a-billion dollars from the previous quarter.
It also appears to be growing quickly-- as the company announced recently that it had doubled the number of subscribers from 1 million to 2 million in a matter of only 6 months. While switching to a subscriber-based model might hit revenues in the short-term, if the number of subscribers continues to grow at a rapid pace, it should be offset in the long-term. Shifting Office to the cloud is simply something that needs to be done, especially to prevent further intrusions by Google (GOOG) Docs -- even if it means taking a near-term hit on revenues. It also leads to less pirating.
An emerging leader in unified communications
Microsoft is also quickly making gains and establishing itself in other enterprise markets, which doesn't seem to be brought up much. Take Unified Communications for example. It is currently competing mostly with the dominant Cisco (CSCO), who owns about 24% of the market. Microsoft now owns 19%.
The UC collaboration market includes things like enterprise voice systems, telepresence, collaborative workspace software, email and even enterprise social networks. Synergy Research explained that:
"Microsoft and other vendors that are transitioning to a software pricing model are benefiting from this spending shift and we anticipate that this change will continue to have a positive impact on future revenues... Microsoft continues to gain share in UC collaboration and is closing the gap on market leader Cisco."
Microsoft's success in UC is good for its future prospects. The CEO of Synergy pointed out that just its enterprise voice revenues are growing close to 60% on an annual basis, which is far faster than the likes of competitors like Cisco. Microsoft Lync, an enterprise communications suite, is now a more than $1 billion business by itself, and has been growing by double digits for four consecutive quarters now.
Competing in the cloud
Microsoft's Azure is also establishing itself as a leader in cloud. Challenging Amazon (AMZN), Microsoft has been building up its cloud offerings. Azure is now another business that is doing over $1 billion in revenues. Microsoft is in second place behind Amazon Web Services, but AWS' lead is very noticeable. Microsoft is quickly looking to catch up, however.
Microsoft recently decided to cut prices to get closer to the leader, and has also been adding vital and important services to catch up as well. One planned addition to Azure is to create a dedicated public cloud for federal government workloads, for instance. It also recently rolled out automatic backups from within its Windows Server and Systems Center. This allows files to be backed up directly into Azure. Microsoft is taking tremendous steps to compete with Amazon in the cloud space, and by integrating other offerings, such as Office 365 and UC services, the overall appeal of Azure should continue to grow.
Valuations
(Click to enlarge)
MSFT Cash and ST Investments (Quarterly) data by YCharts
It's hard to find a balance sheet stronger than Microsoft's. It should also be noted that much of Microsoft's cash is trapped overseas. The company does have a relatively low debt load, however.
Speaking of debt, the company recently sold $8 billion of bonds in dollars and euros, which was a record for the company, and is probably smart to do while interest rates are so low. This brings up another point, too-- Microsoft is one of only four companies in the world with AAA-rated credit.
(Click to enlarge)
MSFT data by YCharts
The company has experienced a nice run up this year, outperforming the S&P, but how does it stack up valuation wise?
(Click to enlarge)
MSFT Dividend Yield (TTM) data by YCharts
Microsoft still looks fairly to under-valued at current levels, despite the big run-up. This can be attributed to its ability to continue to grow its earnings significantly. It's dividend also continues to hover around 3%, due to the big double-digit increase.
The bottom line
A lot of times Microsoft gets no respect. It's often viewed as a stodgy, PC-reliant, "dead money" company; but this image is a misunderstood caricature. It has plenty of growth businesses lined up-- with many being cloud-based enterprise businesses or existing money-makers being converted to the cloud, for continual growth going forward.
Now that the Nokia (NOK) deal has been approved by the DOJ, Microsoft is that much closer to controlling, unifying, and tightening-up its overall ecosystem. There are also rumors of a converged OS coming, which would unify all devices and services even further-- making its overall ecosystem enviable, hard to duplicate, and even "stickier".
The company is one of the strongest in the world financially and is extremely shareholder friendly. Buying Microsoft today at just 14 times earnings with a 3% yield is a much different story than buying it 10 years ago at 30-40 times earnings with little or no dividend protection. The past doesn't predict the future. Microsoft will continue to outperform in my opinion, or at least track the market and continue to increase its dividend at an above average rate -- which makes it a solid long-term pick.
Disclosure: I am long MSFT, CSCO. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article. (More...)
This entry passed through the Full-Text RSS service — if this is your content and you're reading it on someone else's site, please read the FAQ at fivefilters.org/content-only/faq.php#publishers.
from SeekingAlpha.com: Home Page http://seekingalpha.com/article/1879941-microsoft-unappreciated-but-still-growing-shareholder-value?source=feed
Aucun commentaire:
Enregistrer un commentaire