When this stock underwent its
in 1986, four of the company's employees became instant
billionaires and 12 thousand of the firm's employees were
The share price continued to soar.
But the tech bubble of the early 2000s, combined with increased
competition and failure to quickly innovate has pushed this tech
giant from a split-adjusted peak of nearly $50 a share to a little
more than half its value today.
Hovering not far above $25, things are once again looking bright
for this tech giant. The company is cheap as measured by several
standards such as trailing price-to-earnings (P/E ) ratio and
thePEG ratio (P/E-toearnings growth). In addition, it has several
innovative products just launched and in its pipeline. As a result,
it could be one of tech's biggest turn-around stories this year.
If you haven't guessed, I'm talking aboutshares of the world's
largest software company,
Helping drive the tech giant back into a growth mode are three
1) Its Kinect video game technology for the X-Box gaming platform
2) The Windows 7 smartphone
3) A new Windows system for netbooks and tablets
Kinect's far-reaching implications
By far, Microsoft's most "game-changing" product is its Kinect. The
wireless technology enables audiences to control video games using
just their body movement -- without any remote control. More than 8
million Kinect units sold within the first two months on the
Sales are expected to remain strong into 2011, since Microsoft
plans to make sure the technology is applied beyond gaming. In the
near future, audiences should be able to use Kinect to control
movie service and Hulu's TV service to pause or start a show
through voice and gestures, without using a remote control.
Further down the road, Microsoft may license the Kinect software to
TV and cable companies to push its version of integrated Internet
TV, similar to
or Google's (Nasdaq:
) Internet TV.
Success in smartphones... finally...
From the standpoint of smartphone technology, Microsoft's Windows
Phone 7 has lagged behind competing systems like Apple's iPhone or
Google's Android platform. However, the Windows Phone 7 is
well-designed and attractive. It will likely gain traction as
consumers become disillusioned with the ongoing reception and
programming problems reportedly plaguing the iPhone.
Its growth projects will be further enhanced as Microsoft
solidifies deals in-progress with phone carriers like
For now, Microsoft is doing well just selling apps, such as its
OneNote office software, for a range of smartphone platforms,
including the iPhone.
Netbooks and tablet PCs
Further propelling the company is anticipation of its new Windows
system optimized for low-powered devices like tablets and netbooks.
Likely to be released next year, the system will run on ARM
) processor, instead of the traditional Wintel (Windows-Intel)
chip. Some speculate the system could be a potential needle mover
in the tablet and netbook market.
All the buzz surrounding Microsoft's new products should translate
into growing revenue andearnings .
Analysts' expect full year 2011 revenue will increase 9.8% to $68.6
billion from $62.4 billion last year. By 2012, analysts project
revenue will rise a further 6.9% to $73.3 billion.
outlook is equally robust. The 34 analysts following the company
estimate 2011 earnings will increase 16.7% to $2.45 a share, from
$2.10 in 2010. By 2012, earnings are expected to rise another 9.8%
This earnings growth should help jumpstart the share price, since
Microsoft is currently attractively valued, with a trailing
ratio of just over 12. In contrast, the trailing P/E of the S&P
500 is more than 50% higher at almost 19.
And finally, as I mentioned earlier, there's the stock's
ratio. The PEG ratio is a key way to measure value. The one-year
version of this measure is calculated by dividing the trailing P/E
ratio by the projected earnings growth rate. Any number less than
one indicates that a stock is cheap and the share price could
rise. Right now with a P/E of just over 12 and expected 2011
earnings growth of 16.7%, the PEG ratio is 0.72 (12/16.7 = 0.72),
making Microsoft a definite bargain.
While investors wait for the market to recognize value, they get
paid to sit. MSFT'sdividend yield is about 2.3% right now, more
than 50% higher than the 1.55%yield of the average S&P 500
stock. Thedividend is in no danger either, since the stock's
currentpayout ratio is 23.1%. With more than $43 million in cash on
thebalance sheet and a history ofdividend increases, another
boost should not be ruled out, either.
Action to Take -->
With exciting products recently launched and in development, strong
earnings growth and a low valuation Microsoft looks attractive
right now. In my mind, the stock is a worthwhile core addition to
any investor's portfolio.
-- Dr. Melvin Pasternak
P.S. -- We've just identified six surprising events that could
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Disclosure: Neither Melvin Pasternak nor StreetAuthority, LLC
hold positions in any securities mentioned in this article.
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