Re MSFT : While I am disappointed by the earnings guidance for 2007, I decided that MSFT is cheap enough for me to add to tmy existing position at a little more than 24$. Despite the miss, MSFT earning will be growing from 1.31$ to 1.40$/share or about 7%. Not great but definitely better than no growth. Revenues will be up around 15% for Y07, which is quite respectable.
The reason for the earnings miss, is not loss of gross margin but the fact that the company will spend (and immediately expensed) 2B$ more than anticipated. When comparing PE, which at 1.4$/share earnings is around 17 , one should consider that the earnings quality if very high – nearly all of the earnings are FCF, since MSFT Capex requirements are fairly low.
MSFT is a tough competitor with vast resources. Think about the XBOX360,where they have taken the momentum away from Sony, despite Sony’s 80% market share. With Sony now reeling with their XBOX launch, MSFT goes out for the kill and takes market share. Yes, they will loose 400M$/quarter (which again is fully expensed) but it looks to me that they will level the playing field with Sony next year at the very least.
I think the current take of the street that those 2B$ will be lost without tangible benefit. I think that this is a far too pessimistic stance to take and I somewhat admire the gutsy bet this company is making, since it shows that MSFT is not run by short term earning considerations only. |
