Thursday, November 8, 2012

Bullish About Microsoft? Bill Gates Thinks Differently

Many investors might think Microsoft (NASDAQ: MSFT) is undervalued and the stock is a good buy right now. Its new operating system, Windows 8 was recently launched. Windows 8 is known to work on both tablets and personal computers, creating synergies for software developers. SamsungHTC and Nokia are three smartphone devices to have Windows 8 bundled in. The $237 billion software company, which pays a consistent dividend and is valued at only 15.3x P/E, appears to be cheap to many value investors. However, insiders are thinking differently.
From October 21 to 24, Bill Gates, the founder and chairman of Microsoft has sold 20 million shares in the market for around $28 per share. The total value sold was nearly $560.3 million. Three months ago, from July 25 to 27, he sold 13 million shares, with the total value of  $381 million. Should we follow him or keep being bullish about Microsoft?
Recently, Microsoft announced poor Q1 earnings results. Revenue was 16.01 billion, 7.8% lower than the same period last year. Its operating income experienced a 26.3% year-over-year decline to $5.31 billion, and Q1 EPS was $0.53, lower than last year EPS of $0.68. Although its total revenue decreased, due to the PC demand slowdown, its enterprise revenue kept growing. Its Server & Tools business recorded $4.55 billion in revenue, an 8% growth from Q1 2011. Microsoft’s only current growth driver is a Windows 8 operating system. It is said that this operating system is convenient for users, as it is fully compatible with other existing hardware and software, which works well with Vista or Windows 7.  In addition, it is able to sync information with multiple devices. 
As of September 2012, Microsoft has a strong balance sheet. It has $66.6 billion in cash, $2.4 billion in short-term debt, $9.1 billion in long-term debt and $68.8 billion in stockholders’ equity.  Currently, it is trading at $28.21 per share. The total market capitalization is $237.43 billion; the enterprise value (after subtracting cash and adding debt) is $183.73 billion.
Compared to its peers including Apple (NASDAQ: AAPL)Google (NASDAQ: GOOG) andOracle (NASDAQ: ORCL), Microsoft is paying highest dividend yield to its shareholders. Its dividend yield is 3.3%, whereas Oracle’s and Apple’s are 0.8% and 1.8% respectively. Apple just began to pay dividend the first time during the last 10 years. Google doesn’t pay a dividend.

Net margin (%)
ROIC (%)
Dividend yield
All of those four companies are quite conservative. They use little leverage; Oracle is the most leveraged among the four, with only 0.3x D/E. Microsoft has the least net margin among the four, of 21.7%, whereas Apple’s, Google’s and Oracle’s are 27%, 25.7% and 27.6% respectively. Notably, Apple seems to be the most interesting stock with extremely high return on invested capital, no debt but it is valued cheapest in terms of P/E ratio. Google is the most expensive with nearly 20x earnings valuation.
Foolish Bottom Line
Microsoft still delivers to investors satisfactory operating figures, with 21.7% net margin, 20.4% ROIC, 2.8% dividend yield and reasonable P/E valuation of 15.3x. However, it does not stand out among its peers like Apple. With Bill Gates’ heavy selling, I would rather follow Bill Gates and not to involve with Microsoft at the moment. 

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