Microsoft has been a lumbering dinosaur for over a decade now and its stock has been a stick in the mud to say the least. Countless times over the years, pundits have proclaimed that the stock was ready to takeoff and be relevant again. It even declared a special dividend of over $30 billion to shareholders but that also failed to get it going. Investors in the stock are asking this question: Is it time to go up now?
Terrific Earnings
The company usually doesn’t exceed estimates by too much, but it posted a seven-cent beat in its third-quarter report, coming in at 62 cents versus the 55-cent consensus. Even more impressive to me was revenues which zoomed 25% over last year and also beat the estimate from analysts. The main growth driver for the company was an 82% jump in its Windows and Windows Live segment. This group represented 30% of the revenues. Mister Softee has sold about 240 million Windows 7 licenses.
To me, an unexpected bright spot was the Entertainment & Devices segment which was up over 12% sequentially. Sales of Xbox game consoles increased 38% and was the best selling console in the U.S. market. I am not a gamer, but I wasn’t aware that they had the best one out there. That being said, I don’t think this will be the growth driver that the company is looking for year after year.
Microsoft Office 2010 proved to be quite successful and unit shipments were 20% more than Windows 7 in the same time after its launch.
Is This Enough?
This is the million dollar question that people are asking. I was more than impressed by the company’s successful quarter, and a few investors seemed to feel the same way as the stock did rally a few percent after the report, but longer term the future is less clear. I am not a technology expert, but it seems that Cloud Computing is a macro theme that Microsoft can surely profit from.
That being said, I just don’t think Microsoft will be an explosive stock for the bulls. I would consider it more of a value play. It is currently trading at about 10x next year’s estimates, which is cheap historically, but the growth rate isn’t there to justify too much more. I think a dividend hike would be a terrific move by the management and bring in even more income-oriented investors into the fold. The dividend yield stands at 2.5% right now. I think a 3.5%-4% yield would do wonders for the stock that has acted like its feet are in cement for a decade.
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