My thoughts on Microsoft ...
My sense is that Microsoft has not yet regained investor confidence. Sure, the traditional, perpetually optimistic, rose-glassed shareholders see light at the end of the tunnel, but many aren't sure if it's end-of-tunnel light they're seeing or a freight train coming their way. I've maintained for some time now that Microsoft will not be breaking any new ground, or for that matter, re-gaining much lost ground, until positive results are demonstrated to be meaningful, accelerating, and permanent. What we must see is an end to the steady stream of unpleasant surprises, both from Microsoft, and from the PC industry in general. In addition to this, we must see evidence that this current deterioration of share prices resulted from normal, temporary, and expected market fluctuations, and not from fundamental changes in the world marketplace and Microsoft's position in that marketplace. The last thing investors need is to acquire shares after a major decline, thinking they astutely scooped a bargain, only to discover they've climbed aboard a sinking ship. So, before acting, investors must be certain in their minds that the piece of company they're buying is engaged in a business with profit and growth potential, and that that company also has the ability, motivation, and resources to execute their plan successfully. I believe Microsoft is indeed such a company.
This naturally leads to a question of timing. Is now a good time to buy, or will a better price become available in the near future? The flip-side of this would be how much is risked, or opportunity lost, if the price rises as investors wait for a clearer view forward. Many have posted how low MSFT P/E is recently. It now stands at about 30. Since I've owned MSFT, I've seen a high PE of 75, and a low of 20. The average for the decade has been 37. Today's price may not be the lowest we'll see, but it seems reasonable enough. Admittedly, Microsoft has been on thin-ice for a while now, facing a number of challenges from competitors to judges, but the climate is cooling, and we can expect the ice to thicken: Just how fast remains to be seen.
For much of the time I've held this company, its growth rate was 1.5 times its PE ratio. I was comfortable with it falling well within the rule-of-thumb many investors use. (At the same time CSCO's growth was double its PE ratio, making it good investment too.) Today, investors seem less guided by this as an indicator of value. I don't know if this is wise on their part.
Cheers, PW.
Disclaimer: Anyone who followed my advice last year will be considerably poorer now. Those who did the opposite have prospered. |
