Microsoft: A Confounding Story for Investors

Earlier this month Microsoft reported its earnings for the fourth quarter of 2012. For the first time ever, the company reported a quarterly loss, due to its acquisition of aQuantive, an advertising company, back in 2007. On July 2, 2012 Microsoft announced that it would take a $6.2 billion write-down because of the acquisition. Hence, despite sales of $18.06 billion, Microsoft posted a quarterly loss of $0.06 per share. The good news is, disregarding the aQuantive mess, Microsoft still managed to pull in a profit of $0.73 per share beating expectations of $0.62.

Nonetheless, advertising, which accounts for less than 4% of Microsoft’s revenue should not concern investors. In fact, stockholders did not seem to have reacted negatively to the write-down, remaining confident in the company’s future prospects. Fundamentally speaking, the company is in a solid state. Its cash reserve is huge and still growing. With over $60 Billion in cash and short term investments Microsoft can certainly acquire companies, buy back shares, increase dividend rates, or invest in R&D for new products and services.

Compared to competitors like IBM and Oracle, Microsoft is faring pretty well in its enterprise-oriented operations. Hence, despite losing market share to competitors like Apple on the consumer side, the company continues to keep its large market share on the business side. Businesses will continue to be cash cows for Microsoft in the conceivable future. Even as businesses are cutting cost everywhere, Microsoft still managed to see increases in its business software revenue.

The flip side of the story has to do with weakness coming from the company’s Windows and Windows Live Division, along with its Online Services Business. Windows 8 will be coming out in October 2012 along with the much anticipated Windows Phone by Nokia, which Microsoft hopes will help turn the tables on its declining market share in the smartphone operating systems market. Truth is, with Apple and Google’s Android in the game, Microsoft faces some tough competition.

The decline in revenue from Microsoft’s operating system and office products may indeed be of concern to investors, but the company makes up for this in other areas. Perhaps Microsoft’s strongest driver of growth driver is its Entertainment and Devices division, which saw a 20 percent revenue growth compared to the same quarter a year ago. Products in this division include Skype and Xbox. This is an area where Microsoft has gained and will continue to gain market share in the consumer market. Additionally, depending on the products that the company may roll out in its future, there is definitely a potential for Microsoft to increase its market share and make huge profits in the growing smartphone and tablet market.

Nevertheless, despite mixed performances across its business divisions, Microsoft has been steadily growing dividends and increasing cash flows. On a PE basis the company is also cheap, trading at a 10X adjusted FY 2013 earnings. With a 2.66% yield the company is now paying a $0.20 quarterly dividend.

Investors looking for value, stability, and solid dividend payments should indeed take a closer look at Microsoft. Despite market share pressure in certain business areas, the company maintains its strong foothold in the business world. Truth is, PCs still dominate our cubicles.