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LWRAS in 2015

Updated 1.13.2015

As is traditional here, the new year brings a new resolve to publish on a more regular basis and build and audience. Rather than waste too much time listing resolutions and promises, as editor I will simply note that much has changed here behind the scenes at LWRAS. Much of the organizational shifts implemented in 2014 will continue into 2015. New areas of coverage will include food technology, specifically the bourgeoning faux meat from plants industry.

The 2014 archive of content can be found here.

Is it time to sell MSFT?

Updated 1.12.2015

LWRAS is a long term shareholder in Microsoft Corporation. Recently, after years of languishing, the price of Microsoft’s shares have risen to close to a five year high. At that point, a review of the reasons for holding the stock become necessary. What follows is the information used to answer the question.

The decision: Hold the stock

MSFT replaced Steve Ballmer and Wall Street rewarded it with a higher stock price. Mobile is the new focus of the company. Had MSFT it decided to kill its cash cow? Rather than keep the bottom line until, well the bottom of this post, the answer to question was that after reviewing the articles and and SEC documents discussed below, the decision was made to hold the stock. Microsoft stock trades on the Nasdaq under the ticker MSFT.

There is no shortage of outlets covering Microsoft the company and stock. According the this Seeking Alpha article this past Black Friday, 53% of consoles sold were xbox; most were bought by families. So last year MSFT did everything wrong and hacked off core gamers. But, and here’s the rub for “gamergaters”, the market IS bigger than core gamers. MSFT corrected the errors (dropped Kinect, lowered the price) and this year lowered the price again. Quoting from the linked article:

Sony still leads the 8th-generation console battle nearly 2-to-1 in sales (15 million sales vs. 8 million sales), but thanks to a lower price point this season, Microsoft was able to re-establish its typically strong relationship with casual gamers, a staple of the preceding two generations. According to Nielsen reports, 66% of Xbox One shoppers bought the console for their kids, compared to only 45% for the PS4. In consumer studies, 37% of kids aged 6-12 want an Xbox One, while 37% want a PS4. This is the only area where Microsoft is drawing level with Sony, which beats Microsoft in the teen (36% vs. 35%) and adult demographics (21% vs. 16%).

This analysis published at Seeking Alpha contends that MSFT is over valued by 15% based on a DRAG analysis by the author. DRAG analysis is new to me, and stands for Dividend and Risk Adjusted Growth. Basically the author thinks it’s a decent stock and company but is over priced at current EPS growth projections, which he says is 6.5%. I have no clue from which nether region he yanked that number.

In contrast, this analysis (also at Seeking Alpha) contends that MSFT is firing on all cylcinders. It provides good overview. The author notes that the PS4 is superior to Xbox One, but the “DRM” issues have been solved and MSFT is dropping the price. So Xbox One is still not as good, but offers the better deal. And they unbundled the Kinect which was $100+ of the price. DRM means digital rights management. MSFT bought Mojang, which creates Minecraft. Microsoft is skipping Windows 9 and moving ahead with Windows 10. Windows 8 didn’t seem to please anybody. PC sales are still down by most estimates, so the cloud business is even more important. Windows 8 was designed for touchscreens, but too many users still use a standard keyboard. The are selling wearable devices (because they don’t want to get left behind) MSFT’s band is $200, Apple’s cost $350; and MSFT’s was supposed to be available to be bought for Christmas. Did any sell? And is copying Apple really the right way to go?

This Seeking Alpha analysis says to buy it for the yield which at current prices is about 2.5%. MSFT’s new strategy is to move into the cloud. GOOG and AMZN are the primary competitors mentioned. Amazon has never been profitable, and Google makes money selling ads on search, which is their cash cow. Can MSFT replace the money from killing their cash cow? That’s the bet. According to this author, the surface is not selling, but xbox did, and in the out years the xbox is profitable.

Final thoughts

Office remains the cash cow. Office is NOT free. You can still buy an individual program for one or more computers. However, what you get for the one off price is much less than if you buy a “Subscription” to Office 365 as of November visit to the MSFT online store. The subscription model, if it can be established as the default offers potentially significant benefits to Microsoft. These include regular, recurring payments, ability to push updates at customers and getting around IT reluctance to upgrade systems. As with all subscriptions, over a long period of time it winds up being more expensive than simply buying the package in the first place.

Mobile is the term most analysis use when touting MSFT’s future, but I think it’s a mistake to ignore the cash machine that is Office. And I’m not convinced yet that the options that Google and Apple offer meet the same need. Not that they won’t in the future, but that they don’t now. And in creating an ongoing subscription, the inertia to changing from Office (already quite large) increases.

And MSFT pays a dividend, which it is increasing. So even if the stock price doesn’t continue to ascend in the short term, you are getting paid to wait. The company has little debt, and might have even less if the US would fix its tax codes.

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