Microsoft heads into tonight’s earnings report coming in on a high, having recently breached the $40 threshold for the first time in forever (it’s all Frozen references this week, folks). The company pushed past $40 a share in early April for the first time in nearly 14 years, and spent most of that time ensconced in a tight range between about $22 and $35 a share, depending on what the overall market was doing. It tanked in 2008 with everything else, and then spent the 2010-2012 period putting together a cumulative 13 percent price loss in the midst of a raging bull market, if evidence of its sad-sack status couldn’t be more apparent.
This year, though, the company’s been the beneficiary (along with the other “horsemen,” Cisco, Intel and Oracle) of a shift away from overvalued momentum-driven stocks towards cyclical technology stories. These are the types of companies that produce steady revenues even if they’re not doing anything but collecting on consistent upgrades of stuff that everybody needs and doesn’t really like. And really, the company had a stranglehold over PC operating systems that it defended aggressively, let’s not kid ourselves.
For what seems like the better part of a decade, the company has also been talking about how it plans on getting ahead for the next technological leap happening around it. Personal computer sales are bound to be slack, because people aren’t buying those and they’re now buying tablets. But hope springs: CEO Satya Nadella plans on taking analyst questions on the conference call, which isn’t the usual thing for Microsoft.
Sometimes changes in strategic direction mean something for real, and even though analysts at times are overly obsequious and eager to please their corporate overlords (“Congrats on the quarter, guys”), they’re still the voice of someone outside the company and therefore aren’t as likely to be blowing smoke. The company’s planning on focusing more on mobile apps and cloud computing in coming years – probably the right choice, given the trend in computer technology at the moment – but the question is whether they can truly capitalize or not.
News from March showed the firm plans on debuting an Office version for the iPad. That put a charge into the stock and would be something of a game-changer; the stock is now the fourth-best in the Dow this year, up 6.8 percent. Starmine’s earnings quality score has been pretty darned high for the company for three years running.
Free cash flow is generally increasing, it’s been paying more and more dividends every year, and they even think the company’s being underestimated by the market, with the $40 or so price assuming a 4.4 percent annual growth rate over the next decade, whereas Starmine sees growth at 6.6 percent, in line with the five-year historical average – which should make it worth nearly $48 a share.
Again, though, that implies an avenue for growth. The Windows division isn’t it. This mega-division posted between $18.68 billion and $18.84 billion in revenue every year for four years running, falling from 30 percent of overall revenue to 24 percent (and that’ll keep shrinking). Again, something to be said for consistency here (for you dividend folk), but that isn’t “growth.” (It’s not “shrinking,” either, so there’s that, too.) Business solutions carries about 1/3 of revenue – and that’s been steady. But the gains may be more likely in the server/tools division, or entertainment/devices for any real traction to be gained. So look to the cloud, Microsoft.