Comments on: Microsoft Price Watch

By: Microsoft Price Watch - Cash Adjustment - Fat Pitch Financials

Microsoft Price Watch - Cash Adjustment - Fat Pitch Financials — Tue, 06 Feb 2007 15:45:02 +0000

[...] I just received a great comment regarding my recent article on valuing Microsoft. The reader noticed that I only used $9 billion in net cash to determine the intrinsic value of Microsoft shares. However, that $9 billion in net cash only included cash and equivalents. It did not include short-term investments, and Microsoft has a significant amount of short-term investments. [...]

By: Financial Carnivals - Fat Pitch Financials

Financial Carnivals - Fat Pitch Financials — Tue, 23 Jan 2007 04:45:47 +0000

[...] This week’s Festival of Stocks was published on the Rule One Investment Community’s website. I encourage you to take a look at this weeks entries. My submission on Microsoft’s intrinsic value was included by ROIC in this week’s Festival. [...]

By: ROIC :: Phil Town & Rule #1, Warren Buffett, Ben Graham Investment Community

ROIC :: Phil Town & Rule #1, Warren Buffett, Ben Graham Investment Community — Mon, 22 Jan 2007 06:51:53 +0000

[...] George of Fat Pitch Financials presents Microsoft Price Watch. George finds Microsoft’s fair value of around $30. [...]

By: NS

NS — Sat, 20 Jan 2007 15:01:50 +0000

I think George’s thought process on MSFT is justified. Estimates of intrinsic value are not static, as they change over time as new information arises. MSFT has made some good uses of capital – remember they tendered at $24.75 – which created value for the remaining shareholders. So I don’t see any reason to be concerned when an estimate of intrinsic value changes.

In addition, your reference to Zune and XBox has little impact on the valuation of MSFT. Yes, it is true they are a cash drain – and I prefer the Apple IPOD myself – but the other three major businesses more than compensate. To cite these as reasons to sell the stock doesn’t make any sense.

Regarding the decision to sell at $30, I think you can rationalize it too. First, Mr. Market can be overly optimistic at times and overly pessimistic at times. While I am not saying this refers to MSFT, the idea of “letting your winners ride” makes some sense. Also, the point about having less than 20% margin of safety has to be taken within context. For a high-quality business, a 20 to 25% discount to intrinsic value is an excellent entry point. Do you expect to buy the Microsoft’s, McDonalds at 50% of their value? – there are too many analysts looking at these names that it is virtually impossible. Secondly, the decision to sell has to be taken into context with respect to other investment opportunities. If you have identified another stock with a greater margin of safety, then it would make sense to sell and move into the one trading at a greater discount.

By: Randy

Randy — Thu, 18 Jan 2007 19:52:45 +0000

I don’t understand this. You rationally determine that MSFT’s value is $25, but you apply some optimistic math to stick with your $30 valuation. But MSFT is already over $31, so you decide to keep it while it’s selling for more than your valuation, but sell it if it gets cheaper? Is this the bizarro world version of Warren Buffett’s process?

I think you have some emotional commitment to MSFT that is making it difficult for you to think rationally about it. Clearly a 5% annualized growth rate was probably too conservative. But even if you think MSFT is worth $36, what margin of safety do you want? Right now you have less than 20%, that’s not very cheap.

You should consider selling MSFT right now. Half of your “upside” is pretty tenuous. Zune is a terrible product. ZBox is a money drain. Vista will likely start very slow as few people need it or want to pay the upgrade costs.

You have a company selling approximately for what you think it is worth. Don’t search for artificial reasons to hold it.

By: George

George — Thu, 18 Jan 2007 04:41:59 +0000

Hi Jason, I did not use FT's Cash Flow Model this time. I instead used a slightly modified version of my Fat Pitch Finder spreadsheet.

By: Jason

Jason — Wed, 17 Jan 2007 21:24:34 +0000

Very nice, George. Just curious...did you use FT's Cash Flow Model?

By: Value Investing News

Value Investing News — Wed, 17 Jan 2007 19:59:28 +0000

Microsoft Price Watch…

As Microsoft’s stock hit a multi-year high today, I decided it was time to revisit my analysis of this stock. After running a discounted free cash flow model, I share a few observations about where this stock is at.
…