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Investing and Economics Blog

Investing: Looking at Microsoft

For years I have thought Microsoft was in deep trouble and yet they were continuing to generate tons of cash (which is not something to take lightly – it is a very strong signal of a successful business). But the future for them just keeps looking worse and worse, to me. The Windows and Office profit centers seemed doomed to collapse (Ubuntu is a great operating system and you have Open Office and Google doc both of which I find fine). The server business and managing corporate networks is one of the few hopes for Microsoft, I think. And things don’t look good there (though probably better than the other profit centers).

It isn’t as though Microsoft doesn’t see the problems. They are trying to build up a gaming business and they have hopes there, I think (not to replace current profits but at least to capture some significant profits). I really am amazed how poorly they have done online. They have invested a ton and continue to lose a huge amount every quarter (over $700 million in the quarter ending March 31st of this year.

Yet year after year Microsoft continued to have tremendous earnings. I can’t see it continuing, but I would not have predicted the earning power they have shown the last 5 years so what do I know. In April Microsoft announced record third-quarter revenue of $14.50 billion for the quarter ended March 31, 2010, a 6% increase from the same period of the prior year. Operating income, net income and diluted earnings per share for the quarter were $5.17 billion, $4.01 billion and $0.45 per share, which represented increases of 17%, 35% and 36%, respectively, when compared with the prior year period.

There is the prayer that the huge amount they invest in research provides future earnings. I do believe their research is incredibly valuable. But I can’t see betting they will find enough earning to replace the losses I anticipate for Windows and Office revenue.

Apple (about $245 billion) has overtaken Microsoft (about $227 billion) in market capitalization. To get the enterprise value (the value of the company excluding cash). Apple has about $38 Billion in cash (including $18 billion in treasuries with a maturity of over 1 year – so not shown as cash on the balance sheet). Microsoft has about $31 billion in cash ($37 billion – $6 billion in debt). Therefore Apple’s business is valued at $207 billion and Microsoft at $196 billion.

Ballmer Dismisses Microsoft Value Issue (May 27, 2010)

Since Mr. Ballmer took over from Bill Gates as CEO in January 2000, Microsoft’s market value has more than halved from $556 billion to Wednesday’s close of $219 billion. Rival Apple’s market value has surged from $15.6 billion to $221 billion over the same period.

Related: Google Posts Good Earning But Not Good Enough for Many – Tesco: Consistent Earnings Growth at Attractive Price – Jubak Looks at What Stocks to Hold Now – Amazon Soars on Good Earnings and Projected Sales

June 21st, 2010 John Hunter | Leave a Comment | Tags: Investing, Stocks

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