Microsoft: Limited vision, limitless cunning

By
A A A

Julian Close 04/07/2014

A lot of people would have you believe that Microsoft's ( MSFT ) downfall began on June 29, 2007. That was the date the iPhone was released, and despite having faced down the toughest foes on the planet, there was nothing Microsoft could do after that point. Microsoft hadn't seen which way the wind was blowing-no longer in the direction of the PC, but toward mobile computing, and at gale force. Now Microsoft is on the sideline, waiting for the inevitable moment when it will slide into obsolescence, penury, and ignominy.

Of course, there are a few notable holes in that story. In 2007, when the iPhone was released, Microsoft's revenue was $51 billion dollars, whereas in 2013, the company made $78 billion. Last year, the company earned $2.65 per share from operations, though it made a significant capital investment in Nokia. Analysts forecast that with the aid of Nokia's brand and intellectual property, Microsoft will be able to increase its revenue by 9% in 2014 and 10% in 2015. The company's profits are likewise expected to climb-to $2.70 in 2014 and $2.90 in 2015.

If you are wondering how Microsoft makes all that money, consider that reports of the death of the PC have been greatly exaggerated. Microsoft is masterful when it comes to making itself indispensible, especially to the business world. The company knows just how much money to squeeze out of each customer, each product, each level of service. Mind you, I think that's terrific. Every company that makes things people want has every right to set prices where it chooses. In Microsoft's case, the longstanding philosophy of demanding everything, from everyone, forever, means it operates at an extraordinary 27% profit margin. Did you want the rest of the numbers? Dividend yield of 2.7%. Cash on hand: $83 billion. P/E Ratio: 14.8. Admit it-you thought it would be higher than that.

Indeed, Microsoft might do well enough even if it never breaks into the smartphone and tablet markets, but it still intends to do that. The company's new CEO Satya Nadella makes such things seem possible. Seeing that what worked for PCs doesn't work for smartphones, Nadella has decided to try it Google's way: Windows 8.1 will be given away free to developers for distribution on mobile phones and tablets. It won't be easy, and Nadella acknowledged the issue when speaking at the company's developer conference.

"We are going to innovate with a challenger mindset. We are not coming at this as some incumbent trying to do the next version of Windows. We are going to come at this by innovating in every dimension. Our vision, simply put, is to thrive in this world of mobile first, cloud first. Our goal is to really build platforms, create the best end-user experiences, the best developer opportunities and IT infrastructure for this ubiquitous computing world."

The new operating system will also come with a voice activated personal assistant, Microsoft's answer to Apple' Siri. Interestingly, Microsoft's personal assistant will be named Cortana , which is the name of an A.I. who becomes a heroine in the highly popular Halo video game series. Yes, the new Cortana will be voiced by actress Jen Taylor who voiced Cortana in the Halo series, which will be a little freaky, but very cool, to anyone who has ever played Halo.

Based on the company's entrenchment, its low valuation, its continued growth and its bold future plans, the chance of any significant, near-term drop in the price of MSFT shares appears remote.


Chart courtesy of stockcharts.com

I seek to capitalize on this strength with a bull-put credit spread. Look at the July 33/35 bull-put spread for at least a $0.21 credit. Use limit orders. This trade has a target return of 11.7% over 103 days, which is an annualized return of 41.6%, (for comparison purposes only). MSFT stock has to fall 12.2% to cause a problem. Be aware that this is an aggressive trade, best undertaken by investors with diverse portfolios and high tolerance for risk.



The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of The NASDAQ OMX Group, Inc.

Originally published on InvestorsObserver.com


This article appears in: Investing , Options

Referenced Stocks: MSFT

InvestorsObserver

InvestorsObserver

More from InvestorsObserver:

Related Videos

Stocks

Referenced

Most Active by Volume

84,725,997
  • $6.69 ▼ 5.11%
68,180,500
  • $3.38 ▼ 1.74%
52,748,572
  • $99.02 ▲ 1.38%
40,996,811
  • $74.92 ▼ 0.36%
37,831,986
  • $15.50 ▼ 0.58%
34,013,720
  • $31.98 ▼ 4.31%
32,417,159
  • $25.59 ▼ 0.78%
31,985,971
  • $54.87 ▲ 1.20%
As of 7/28/2014, 04:05 PM