Microsoft's Next Act:
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By DIMITRA DEFOTIS
Barron's Weekday Trader | THURSDAY, NOVEMBER 10, 2011
Shares of the software giant should get a lift from the next iteration of Windows.
Microsoft is the mega ship among global software producers. And the cost of passage is a bargain among tech stocks.
The stock trades as if the debut of its new operating software, Windows 8, during the second half of next year won't generate any meaningful growth. But over the next 12 months, Windows 8 should prove a stock catalyst.
Trading near $26.28, shares of Microsoft (ticker: MSFT) have declined about 3% in the past year, underperforming the broader market. But they could have more than 20% upside in the coming year, thanks to its soon-to-be-realized earnings growth.
Setting aside Windows 8, Microsoft should continue to benefit as customers upgrade existing software for servers and personal computers. And the company's other consumer-driven investments, from Xbox to Internet phone provider Skype, showcase its ability to stay relevant.
"Microsoft growth is misvalued," says Brian Nelson, portfolio manager of Invesco Charter Fund, which owns the stock. "We don't expect material revenue contributions for Windows 8 in 2012, but it is important for sentiment, and for revenue growth in 2013 and beyond."
Over the next 12 months, Nelson sees margin-expansion opportunities for Microsoft.
Microsoft is expected to produce net income of $23.3 billion on revenue of $75 billion in the current fiscal year ending in June 2012, representing a tiny increase over fiscal 2011. Analysts expect a nearly 3% increase in earnings to $2.78 per share for fiscal 2012, with growth of 11% to $3.08 per share in fiscal 2013.
Trading at 9.4 times the fiscal 2012 estimate, Microsoft is cheap. The company is also a cash cow: it had more than $57 billion in cash on its balance sheet at the end of September, and it recently increased the payout by 25%.
The current yield is 3%, and aggressive share repurchases are likely to continue, offsetting consistent sales by Chairman Bill Gates.
Gates owns more than 520 million Microsoft shares, or 6% of shares outstanding; he sold 20 million shares in October as part of a planned selling program. CEO Steven Ballmer owns a nearly 4% stake.
One big plus for Windows 8: It gives consumers touch capability. That should result in a whole new generation of tablets and lightweight laptops for professionals.
Barrons.com talked with one Wall Street analyst traveling with Microsoft management this week who continues to be impressed with Windows 8 on a Samsung tablet, including its handwriting-recognition capabilities.
Tablet-laptop combinations should be hot by the end of 2012, if they are priced well and boast enough features that differentiate from the competition. The next generation of devices will likely be lightweight, and with features including screens that flip, fast on-off power, and longer battery life.
Apple (AAPL) and its iPad and notebook are a force to reckon with, though Apple is consumed with Apple TV. The Kindle Fire, the latest tablet from Amazon.com (AMZN), is priced at around $200 and offers a color touch screen. Microsoft continues to challenge the Android operating system from Google (GOOG), and has accused Barnes & Noble (BKS) of infringing on patents with its Nook reader.
Microsoft's partnership with Nokia (NOK) also is likely to bear fruit. The touch-screen Lumia phones, unveiled in October, incorporate Windows and are being sold in Europe and Asia, with expanded sales to include the U.S. in 2012.
Analysts caution that Microsoft is likely to be conservative in its expectations for Windows 8 in early 2012. Later in the year, missteps or shipment numbers that are lower than expected could hurt the stock, even if earnings and margins are on the rise.
But some analysts think investors should own Microsoft before the big consumer technology trade show, CES, in early January. Nomura Equity Research has a price target of $32.
And as Windows 8 hits the shelves in devices from July to September of 2012, the stock should start to reflect this burgeoning "ecosystem" as techies call the marriage of software, hardware and other elements that help Microsoft succeed.
In the meantime, investors get an outsize yield for a tech stock. And with a software cycle puffing up its sail next year, Microsoft stock looks attractive in the waters of a choppy market. |
