Jason and Frank both purchased 100 share positions in Microsoft Corporation (MSFT) after its share price dropped 11% because of lower-than-expected earnings guidance. I wanted to chime in on my assessment of the company, and share why I think now is not the time to buy.

Let’s look at the company as a whole to get a picture of how it’s doing. I will be basing all my numbers on the financial data provided by my favorite research site, MSN Money.

ROC

5-year: 16.2%
1-year: 29.5%

Microsoft’s ROC (What is ROC?) for the last 5 years has been a decent 16.2% and the current year has seen ROC jump to 29.5%. This is exceptional, but it’s highly unlikely that a $239 billion company can sustain 29.5% returns for the future.

Growth Rates

Equity Sales EPS
5-year: 14.8%
3-year: 17.1%
1-year: 13.5%
5-year: 11.6%
3-year: 11.9%
1-year: 8%
5-year: 5.7%
3-year: 16.4%
1-year: 49.3%

The only number that pops out there is the 1-year EPS growth of 49.3%, which is largely due to a bad year last year, than this year being particularly good.

Overall
It looks like Microsoft is going to grow between 10% and 15% annually, and because I have faith in the company, I’ll estimate the future growth to be around 12%. Analysts expect an 11% future growth for the next 5 years, which is in the ballpark.

Although the historical PE has been around 30, I don’t think that’s sustainable for a company growing 12% a year. I think 24 is more likely. The PE is currently 18.4, compared with the industry 23.1. If it were to move up to my forecasted 24, you could expect to see a return of 30%.

But here’s the rub. For the last 3 years the stock has traded between $24 and $29, which is a good deal less than the $30.5 at a PE of 24.

Is the stock undervalued right now? In my opinion, yes. You could probably pick up 10% in the next 6-12 months. But I believe this stock is too risky for the potential reward. It seems to me that the market knows something I don’t and there’s not an adequate margin of safety to make it an attractive investment.

Hater. Just kidding, nice post. It’s good to see that one of us still has their sanity around here.

I’ve obviously run the numbers a bit before making my purchase (really), but they look nice and puurrrty the way you’ve laid them out here. Thanks for that; it gives us some common numbers to reference.

A bunch of folks over at Fat Pitch Financials have been calculating MOS for MSFT. Here’s a link: More Microsoft. Be sure to read the comments.

With your sticker price of $30.50 and the current price at $23.50, we’re getting a MOS of roughly 30%. (Granted I bought most my shares $0.75 higher.)

Technical indicators are still pointing downward, although a turn around is very possible considering how the stock traded yesterday and after hours. In any case, if we were waiting to buy $1 for $0.50 we could sit on the side lines until MSFT hits $15.00. But I’m willing to average down on this one. (Hope the stock goes higher, but buy more if it does goes down further.)

I thought there was too big a chance that forgiveness would kick in early with MSFT (the stock) or that Microsoft (the company) would release some big news that would get investors on their side again. They’ve been striking out a lot lately and generally underwhelming people for the past 5 years. But if things start going their way, there is a lot of upside. They’ve got new online services, XBox, software on phones, new Small Business software, new entrances into Web and Image design software, Origami, new server software, new advertising platform… etc etc.

People still see Microsoft as a company that sells Windows and Office, and I can’t blame them for it. Those two products account for over 50% of Microsoft’s revenue. But then Apple was a (floundering) personal computer company until they released the iPod. Now that little white plastic box is their flagship product. Any one of Microsoft’s initiatives have the same potential to change our lives and our investment accounts. (Can you see the sparkles in my eye.) (Look up Sparkle, btw, at MSDN.)

Man, I’m rambling. So I was originally investing in MSFT because I thought the PE given to it has the potential to increase greatly once they really make an inroad into one of these other markets they’re in. So of course I’m grabbing it when it’s even more on sale.

Another reason I was jumping into MSFT was because of its “safe” image and my feeling that institutions were going to be moving into safer stocks in anticipation of a bear market. Well, not only have the institutions shown us that they don’t find MSFT safe, but the market hasn’t exactly been slowing down either. So nix that one.

Still, I’ll stand by my pick right now. I’ll admit that part of my reasoning is based on a very un-mathematical, non-safe, “gut feeling” that Microsoft is going to return to their greatness of yore and deliver something great.

So I’m holding now. Above $25, the stock will likely be out of the risk zone, and I may buy another 100 shares to ride to $30. Below $23, and I will consider selling my position to wait for the new bottom.

MSFT is a ****** [edited] investment. Cant you read teh danm chart? while transports and energy are hitting ne all time highs you are putting your money in one of the most bearish sectors in the freaking solar system.

What is wrong with you people?

Just to add to what Jason said, I don’t *know* energy and transport like I *know* technology. So while I feel comfortable purchasing MSFT at the price that I paid, I would not feel comfortable purchasing an energy or transport stock at any price. Because I don’t know the sector. I have no idea what innovations or out there, what the market-scape looks like, or in fact anything other than the fact that it’s been hot for awhile.

Without knowing more, I’m not willing to invest there, I have some serious questions about the sustained profits the the industry has shown. It seems that the industry profits most when prices of oil show an upward trend and are unstable, allowing companies to quickly raise consumer prices and point to the price of crude as the reason, and then drag their feet when prices start coming back down. So what happens when prices stabilize? Add to that the threat of the federal government stepping in, and I just don’t like the picture. I’m not saying it’s a bad investment, in the least. I’m saying I have questions to which I have no answers. I will most likely pay for this hesitance, but I will not take a leap without looking.

Which is a stark contrast to Microsoft, it’s in a sector that I know, and it’s a company that I know. So I made a buy that I was confident, and still am confident in.

In addition to their technology initiaves, MSFT has untold billions in free cash laying around and a huge real estate portfolio of prime commercial property it owns free and clear. They also have a huge market share in theier segment. It’s too late to take full advantage of the drop, but get some. Don’t expect quick returns, Hold it.

MSFT never ends for you guys. I think your rationale has become more a denial of the stock’s true performance and outlook. Don’t be naive.

The stock is way too volatile right now and the swings can be drastic depending on economic news (as we are seeing today)! We are entering an ease-off/plunge phase of the economy right now as interest rates have most likely peaked. You are in the wrong sector for this phase. Look into consumer staples and utilities if you want to find underpriced performers in the intermediate term.

Wait until MSFT has a serious bottom-out and starts to see a trend of supported stock price increases.

Furthermore, (as I have said before) MSFT is one of the most liquid stocks around. That being said, you are being hurt by the effects of day traders playing around with the stock for very short-term gains. What we are witnessing is minimalist increases based on speculation.

I agree with the thoughts on MSFT. They’re looking more like a value play daily. I suppose you saw the WSJ article this week discussing the same.

I’d be interested in your take on eBay as well (starting to look value). Interesting thoughts over at rawreason on them http://rawreason.com/?p=5

Thanks for the article. I’ve been a Microsoft fan for 15+ years and have made a successful living with Microsoft products. However, I believe recently Microsoft has really dropped the ball with Vista. Sure, the company that I work for is buying Vista licenses, but we’re actually running Windows XP.
Additionally, Office 2007 seems to be lack luster to me, with a new GUI on top of old tricks (and existing problems).
It’s as though Balmer woke up one day and accidentially put on clown shoes and tripped all over himself.
However, I’m seeing light at the end of the tunnel with Windows Server 2008 and SQL Server 2008. Still Vista is a massive flub in my book. Even though S&P says thumbs up, my experience for the next year and a half says thumbs down. Microsoft needs a new stimulus package by way of a new client OS, and soon. I believe Intel and Nvidia will do better when Microsoft does better.

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