MSFT: Good Times on the Horizon?

microsoft-logoAfter some glorious years in the 70s, 80s and 90s, Microsoft (NASDAQ: MSFT) virtually went to sleep in the first decade of the 21st century, bogged down by the dot-com bubble, antitrust lawsuits, disputes on patents, as well as a loss of market share from other more enterprising and innovative competitors. Microsoft has also been a victim of intense piracy; data form many countries in Africa and Asia reveals that more than 80% of Microsoft Operating Systems being used in those countries is pirated. Bill Gates may still be the second richest man in the world, but his company appears to be taking a hit in fast-paced IT developments and the flourishing of competitors such as Apple and Google.

Microsoft was slow in entering the digital mobile and tablet device markets, and long-term competitors such as Apple have virtually pushed them off the track with cutting-edge innovation. An ill-advised attempt to acquire Yahoo! fell through several times and was perhaps a beneficial failure for the company given the position of Yahoo. All these have led to severe dips in the value of this stock. For a stock that was trading at $95 in 1999, the present value of just over $31 per share does not make for very happy reading to many long-term Microsoft investors.

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Microsoft has released the preliminary version of its Windows 8 software, which includes 99 Metro apps. However, Windows is facing very stiff competition from Linux (which is available for free under a General Public License) and PC hardware makers Hewlett-Packard and Intel have been using Linux-based operating systems rather than the conventional Windows OS. Consumer demand for PCs are also expected to drop off as many people adopt the iPhone and Android-based smartphones as well as the corresponding tablet devices for their everyday web browsing; all of which run on operating systems that are not Microsoft.

Microsoft’s enterprise solutions such as its cloud software Windows Azure, Microsoft SQL server Silverlight, etc. are also facing stiff competition from similar products from IBM, Hewlett-Packard and Oracle. Microsoft’s online services, which range from Bing to AdCenter and MSN, all have competitors that are controlling the market place.

It is not all gloomy though. The company may have lost market share and no longer have a monopoly on computing hardware operating systems, but it is still making money. Despite the image of Microsoft as something of a dinosaur, looking at their statistics paints an entirely different picture:

1)      The net profit margin of Microsoft has remained above 25% for ten years in a row!

2)      For every $10 Microsoft has spent on capital projects, it has made $90 in return from its operations! This is a truly remarkable feat.

3)      Its earnings per share and price earnings ratio has been on the rise steadily for the last 10 years.

So what is the future of the share price of Microsoft?

The fact is that if a company is making the kind of revenue that Microsoft is continues to generate, and is regarding its investors with cash dividends as a result, investors will not be too bothered about  losing market share of its older operations. Market share is meaningless if a company is not making money and similarly a company can control a smaller consumer base with larger profit margins.

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Microsoft’s financial strength is its greatest asset at the moment. With a price earnings ratio of roughly 23%, some analysts suggest that Microsoft is undervalued by almost 50%. The company has a strong management, operating conditions are excellent and profitability is not going to be affected anytime soon.

Microsoft has also taken some pro-active steps to re-capture some of the ground it has lost over the years. It seems Microsoft now wants to take the bull by the horns and has made some strategic decisions to overhaul its operational model so as to get a piece of the huge pie that Apple and Google are enjoying in the smartphone and tablet market. A number of collaborations with Nokia have eventually materialized with the launch of the new Nokia Lumia 900 smartphone. What many do not know is that while Apple and Google seem to be holding sway in the smartphone market in Europe and America; Africa and Asia is still very much a large underdeveloped mobile market.

The penetration of the iPhone in Africa is still very low and Bill Gates has already rolled out mobile technology in countries where Google and Apple are not nearly as well connected or entrenched. This is where Microsoft will likely find a return to dominance. Analysts predict that Microsoft will leapfrog Apple as number two in the ranks for mobile software by 2015, it also sees it biggest challenger as Google Android rather than the flashy hardware designer. However, despite the larger consumer base that Android controls, Microsofts strategy will be based on the fact that there are a lot of Android users but there aren’t a lot of Android lovers according to Gartner Inc. All this points to an interesting and potentially bright future once again for the old dinosaur Microsoft.