[Hal: Microsoft is the great Cult Stock of our time.]
There's truth in this, and anyone who's telling themselves MSFT can't go down should sell now. It's a high risk business...but it's also a high reward business.
[Hal: A significant saturation point has been reached. For the past couple years, Microsoft has not been able to fully reinvest its immense earnings into it's core business. Rather than pay enhanced dividends to stockholders, Microsoft has diversified its capital structure into more ordinary and more risky fields of endeavor.]
A valid cause for concern, but is it what's happening?
Most of MSFTs R&D budget this year and next will go into NT, at the heart of their core business. From virtually no presence in the huge and growing server market 4 years ago, they now have a good chance of having >50% in the near future. That market alone is big enough to maintain their current growth rate during the next couple years.
Last fall MSFT weeded out many of the experimental content projects started around the Win95 ship. They're keeping Encarta, Expedia, Investor, and CarPoint, all money making concerns with bright futures. They don't get distracted easily and they're very pragmatic about what's working and what's not. Did IBM do that or did they brag about being a place where nobody ever got fired?
A low return on that big pile of cash could drag their numbers down. Let's check how they're doing on the deals known to the public. Their $1B CMCSA investment is up 90% in one year...wow! The $150M in AAPL is up 33%...not bad. Are these random investments by some arrogant conglomerate that thinks "a good manager can manage anything"? (Quiz to thread: Who is quoted?) No, they are investments that strengthen and grow MSFT's influence in areas they believe are strategically important to the future of the core business.
When they paid $425M for WebTV many analysts thought it was too much, but opinions I've read recently seem to be in consensus that it was a smart move. So smart, in fact, that our buddies over at the Bureau of Success Distribution (DOJ) are investigating the deal.
MSFT recently sold SoftImage for roughly twice what they paid for it. Why? Because nobody says NT can't do graphics anymore. Mission accomplished. The core is strengthened with a sweet profit to boot, and since they don't want to be in a vertical market business like computer graphics services, they cut them loose. Of course, SoftImage's product line is still NT-based.
Does all this sound like a fat company past it's peak that doesn't know what to invest in next? To me, it does not.
[A realistic PE closer to 30x rather than the current 50X should be the case within as little as two years.
That's the conventional wisdom alright, but is MSFT a conventional company? Are they really slowing down or are you just expecting them to because historically others have? Are they making the same mistakes those others did? How much is the best management in the world worth in the 21st century?
Time will tell. Good luck to you, Hal. (meant sincerely) |
