As Microsoft rallies on news of Ballmer retirement is it time to buy Microsoft or sell the stock? Steve Ballmer has been the head of Microsoft for over a decade. During this time Microsoft has remained one of the world’s largest companies but essentially quit growing. Much of this is because of the shift away from personal computers to handheld devices and the influence of social media. Missing the boat on sea changes in the computer world, Ballmer dismissed the iPhone in 2007 as something that would gain little or no market share. Investors are happy to see evidence of a generational change as Microsoft rallies on news of Ballmer retirement. But, what does fundamental analysis tell us about Microsoft? The intrinsic stock value of Microsoft depends on its forward looking income stream which is what is in question and why Microsoft rallies on news of Ballmer retirement. On the other hand Microsoft has a huge margin of safety. It has gargantuan cash reserves both in the USA and overseas. It joined the ranks of dividend stocks some years back. With a projected three percent growth rate it should be selling at closer to $50 than $30. (Microsoft jumped from $32+ to $34.75 as Microsoft rallies on news of Ballmer retirement.
Microsoft Value and Prospects
We think of Microsoft and we think of the Windows operating system. But just where does Microsoft make its money and how dependent is Microsoft on selling Windows operating systems for PCs? According to Microsoft SEC filings here are the results for Microsoft’s main sources of revenue.
Microsoft Revenue Breakdown
|Percent of Revenue
|Growth in Last Year
|Servers and Tools
When we look at the fact that a third of Microsoft revenue comes from Windows and Windows is not growing we can see why Microsoft rallies on news of Ballmer retirement. However, a five percent growth rate in the business category is pretty impressive considering that the economy has not fully recovered from the worst recession in 75 years. An eleven percent growth rate in servers in tools is doubly impressive. Even as the world shifts from PC’s to hand held devices Microsoft still makes software. And two thirds of its income stream shows signs of continued growth even if the Windows/software portion needs a bit of help.
Where Is Microsoft Going?
Prior to Mr. Ballmer’s announced retirement Microsoft announced that it intends to focus more strongly on hardware. In addition the company intends to reorganize so that people work on operating systems, apps, services, or devices. Some have suggested that the company is simply copying Apple in this regard. However, just as follow the leader investing can be successful so can a business succeed by copying a successful competitor.
By What Standard Do We Judge Microsoft?
Since Bill Gates retired in 2000 and Steve Ballmer took over at Microsoft share prices have been largely flat. There have been successes like Windows XP and problems like Windows Vista. Critics compare Microsoft to Google, Amazon, and Apple, each of which has grown exponentially during the last decade. The problem for Microsoft is that it missed out on a lot of opportunities that the other guys took advantage of. But if you simply look at early company growth we see a different picture. Google is only nine years old. Amazon is sixteen years old. Jobs came back to Apple fifteen years ago remaking the company. All of these companies have seen excellent growth over a decade, plus or minus. Compare this to Microsoft in its first 15 years after going public during which its stock multiplied in value about a thousand fold. Now we should look at the prospects of Apple, Amazon, and Google now that they too have become giants. As Microsoft rallies on news of Ballmer retirement we might wish to image what the picture will be at Apple, Amazon, and Google in another ten to fifteen years!