Comments on “More Microsoft”

My recent posted titled, “More Microsoft” generated a significant amount of interest. I was a bit surprised by the number of comments that I’ve received. I appreciate all of them, even the comments that don’t agree with my decision to add more Microsoft (MSFT) stock to my portfolio.

I discussed some of my valuation rationale for the Microsoft purchase decision in the comments section of my previous post. Let me republish it here:

I took a linear regression (i.e., a fancy way of drawing a line on a graph) of the past 10 years of Microsoft’s free cash flow. I then used that regression to project the next 11 years of free cash flow. The regression was able to explain 90 percent of the past trend in the data. I then took the present value of the first 10 years into the future and the discounted perpetual value of the 11th years estimated free cash flow estimated to maintain a sustainable growth of 3%. I selected a 10 percent discount rate for the calculations. I then added in cash to get the intrinsic enterprise value of Microsoft and then I divided by the diluted average number of shares. My final result was $31 dollars per share.

From Magic Formula Investing I found that Microsoft Corp (MSFT), Market Cap of $248,365.25 ($ Millions), pre tax earnings yield of 8% and a pre tax return on capital of greater than 100%. Microsoft was in the top 100 MFI stocks with over $1 billion market cap.

Steven of ValueBlogReview is apparently thinking along a similar line. In his comments regarding “More Microsoft”, Steven wrote:

Even assuming growth of 10-11% (which I would give a50-50 chance) you get to just about a 45% MOS with the stock at $24.50.

Another reader, Max, came to a similar finding in regards to valuation. He wrote:

Microsoft as a huge moat, but not too much growth, so I’m going to put it at 20x EBIT, which for a DCF calculation means I am assuming a 10% RROR and 5% growth in perpetuity.

Enterprise Value = 20 * 14B = $280B
$280B + $34B (cash) = $314B
$314B / 10.33B outstanding = $30.4 / share

I agree that at minimum MSFT is worth what it’s selling for today, as no matter what calculations I do the lowest # I come up with is around today’s price. So, that’s some downside protection, plus MSFT’s current moat on operating systems keeps that cash coming in.

Sam Adams had a different opinion. Sam commented:

What you have here is an investment with all themarket risk and a very limited reward. You might make some money here, you might lose some.

If you want low risk, buy a CD.

If you want to invest , find something with some mojo

Jim Chan from Collecting Wealth thinks I jumped the gun on purchasing Microsoft. He writes:

While I don’t think MSFT is a bad investment opportunity (not a particularly exciting one for me, even at this level), I think you might have jumped in a little early. Purely technical (read, short term) prospect calls for a further decline. At the very least, you probably should’ve waited till the volume has subsided. Back to the “not so exciting” part, before the slide, my calculation (there seems to be quite a few Buffett followers read your blog) showed it was trading at fair value. So the drop represents the discount that (30%) you can Steve and other have discussed. To me, that margin is still too shallow.

Looking in the rear-view mirror, I think Jim Chan makes a valid point. I don’t normally look at the technicals when buying a position in a stock. However, since reading Phil Town’s Rule #1, I’ve been considering using technical analysis in a very limited way to enter and exit positions. Maybe I should review Phil Town’s “tools” and see how they could have helped me in deciding when to buy Microsoft.

Finally, Chris from InvestorGeeks agrees with my valuation but writes:

My sticker is about $31, which gives me a MOS of 30%, however, given that the stock has traded between $24 and $29 for the last 3 years, I’m thinking the market knows something I don’t, which furthur hurts my MOS.
If you have the time to do the research, I think this is too risky for the potential reward.

In response to Chris’ comment, I don’t think that Mr. Market knows something that we don’t know about Microsoft. I just believe Mr. Market is sort sighted and gets easily depressed when major product release dates are missed. I agree with Mr. Market that Microsoft is going to have tough year, but I believe in the long run they are setting themselves up for some major improvements in the long-term.

I’m sure there are other opinions on whether Microsoft is currently a buy. Please feel free to share your thoughts and analysis either back on the original thread or down below.

Comments

  1. By Steven

  2. By Steven

  3. By George

  4. By Steven

  5. By George

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