Browsing Category: "Microsoft"
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.
In fact, Microsoft’s balance sheet has over $22.7 billion in short-term investments listed in the most recent 10-Q. For the most part, those short-term investments are the equivalent of cash since they are primarily invested in fixed income securities that are investment grade and easily sold for cash. Taking these short-term investments into consideration, I really should have determined that net cash for Microsoft is currently $31.8 billion.
As Microsoft’s stock hit a multi-year high of $31.45 today, I decided it was time to revisit my analysis of this stock. I first bought stock in Microsoft (MSFT) on October 10, 2005 and then I bought it again on May 1, 2006 when it once again dropped below $24.50.
I originally determined that MSFT had an intrinsic value of at least $30. I provided my calculations along with those shared by some of my readers in a previous post about Microsoft’s value. Today, I decided to run another discounted free cash flow model to determine if I need to update my intrinsic value estimate. Read the rest of this entry »
Eric Savitz, author of Barron’s Tech Trader Daily, reports on the various analyst reviews following Microsoft’s Analyst Day. The main news from the meeting involved the introduction of Zune, Microsoft’s iPod challenger. It was also reported that there could be further delays with Windows Vista to ensure that the product is ready.
In terms of what the analysts had to say, I found it interesting that the analysts’ value targets ranged from $30 to $33. I reported back in early May that I estimated that the intrinsic value of Microsoft’s stock was about $31. I took some heat for that estimate but it doesn’t look like I’m too far off from the professional analysts for whatever that’s worth. Rick Sherlund of Goldman Sachs came in at the lower end with a target of $30 and the UBS analyst, Heather Bellini’s target came in at the high end of the range.
Brendan Barnicle of Pacific Crest Securities noted it looked like work on Office was going better than Windows Vista. I did not realize that another version of Office was already in the works. If it does a good job in facilitating online collaboration, I think a new version of Office could help add to revenue growth.
There is a lot of change underway at this giant wide moat tech company. I think if they can turn this ship in the right direction, there will be a lot of value generated by this stock.
[Full Disclosure: I own shares of Microsoft (MSFT).]
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 / shareI 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
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.
I couldn’t resist the prices Mr. Market was offering for Microsoft (MSFT) today. Last Friday Microsoft’s stock took a beating. Shares where down over 11 percent. The company lost more than $32 billion dollars in market capitalization. All this as a result of Microsoft missing profit expectations. Given the delays with Vista and Xbox problems, I wasn’t too surprised. However, Mr. Market flipped out.
I took advantage of the opportunity. I put in a limit order earlier this morning for $24.25 a share in one of my accounts and with Marketocracy. I received the following confirmation from Marketocracy:
Your ticket to buy 4120 shares of MSFT at $24.2500, created at 13:27 May 01 completed at 15:45 May 01. 4120 shares were bought at a net average price of $24.2994 including commissions and fees.
I reran my intrinsic value spreadsheet for Microsoft this morning, and I still get at least $30 per share in value. Given that finding, I decided to pull the trigger and add to my Microsoft position. I don’t normally buy a stock a second time, but I just couldn’t pass up buying some more of the widest moat stock at a discount.
On Day 9 of the 30 Days to Becoming a Better Investor project, I introduced you to EDGAR. I also mentioned that I would detail some of the key things you want to look for in a proxy statement. In the following paragraphs, I’m going to explain what a proxy is, how you can find it, and what you should look for when you read one.
A proxy statement details the corporate governance issues that are going to be discussed at a company’s annual meeting. This includes information about when and where an annual meeting is going to be held. It also lists the issues to be voted upon at the annual meeting and details what those issues are. Those issues may include: Read the rest of this entry »
I wanted to make a quick note that I purchased some Microsoft (MSFT) shares today as part of my long term holdings. I found the price of $24.50 per share for this wide moat company to be very attractive. I’m a bit short of time right now to provide further details, but I plan on providing more information about my decision later this week as time provides.
You can follow the performance of my model portfolio (FPF Value) by visiting Marketocracy. You can review my past purchases in this long term model portfolio by visiting my FPF Value archives.
