Arguably one of the most pivotal and revolutionary technology companies in contemporary history, Microsoft Corp. (MSFT - Free Microsoft Stock Report), has all but dominated the personal computer operating system productivity software markets for almost 3 decades. Indeed, the stellar and previously unparalleled success of its initial public offering (IPO) in 1986 saw the stock more than triple in less than a year. Since its inception in 1975, the company’s record of entrepreneurial leadership and shrewd business strategies, coupled with its effective product-integration model and keen ability to build successful partner relationships, has truly galvanized its iconic and indelible position among the technology industry’s elite.
In recent years, however, despite solid revenue and profit growth, the stock has been somewhat range-bound and seemingly lacked the momentum commonly expected from a major player in an aggressive growth industry like technology. There is a reasonable assertion that the company has reached a height more indicative of its bellwether, Dow component status. Some evidence to support this argument lives in the Value Line Ranks box where two bits of data stand out: the equity’s beta, which is .85, or suggests lower average volatility than the broader market; and the Safety rank of 1, the highest that Value Line accords. In addition, panning diagonally across the page to the lower right-hand corner, the Financial Strength rating in the Ratings Box offers further support along these lines, as the A++ rating, again the highest in the Value Line awards, coupled with the company’s high marks for Stock’s Price Stability and Earnings Predictability, make MSFT shares one of the safer investments around.
Furthermore, a quick look at the Annual Rates of Change box displays Microsoft’s solid performance growth rates over the five- and 10-year time horizons. The Historical Financial Data in the Statistical Array reveals that, with the exception of 2009, the company’s revenue, net profits, and cash flow per share have all risen every year since 2002. Moreover, a brief scan of the 3- to 5-year projections, the Price/Earnings Ratio, and the Dividend Yield box ought to serve as the proverbial icing on the cake. Indeed, these factors confirm that, at its recent quotation, Microsoft shares appear to be a highly worthwhile investment, particularly over the long haul.
Notwithstanding lackluster earnings comparisons over the past couple of quarters, which have caused the stock to backpedal from a four-year peak of $32.90 achieved back in April 2012, it stands to reason that MSFT shares have not exhibited any noteworthy break-out advances for an extended period of time. Moreover, the Relative Price Strength chart reveals that these shares have been in steady decline relative to the averages of the broader Value Line universe (Note: the Price Growth Persistence rating in the Ratings Box offers a clue).
There are a myriad of explanations for this divergence in logic across the spectrum of expertise, but a few recurring claims seem to resonate above others. Many argue that as the company grew in scale, its alleged deviation from the counterculture appeal of its creatively driven management style to a more bureaucratic corporate structure had prompted the successive departures of several members of its core brain trust. This may have resulted in a creative vacuum that left the company on the back foot with regards to technology’s latest and most popular innovations. Subsequently, the rise of the smartphone and tablet markets, coupled with Microsoft’s limited and seemingly ineffective efforts to compete in fast-growing consumer markets over the past several years, has proven highly detrimental to the company’s public image as a cutting edge technological innovator. In fact, competitors like Apple (AAPL) and Google (GOOG) have grown to dominate in their respective corners of the tech industry. Indeed, the somewhat meteoric stock price gains for these companies have considerably eclipsed MSFT’s performance over comparable spans.
Meanwhile, others contend that the company has grown too large to manage efficiently as a single entity, and that breaking up the business would unlock more value. Many even suggest that, among other criticisms, current President and CEO Steve Ballmer’s failure to orchestrate a well structured split of the company has been one of the primary deterrents of positive investor sentiment.
All told, it would appear that the pervading theme here is the lack of a foreseeable innovative catalyst that would make investors swoon over these shares again. Microsoft’s recent full-court press into the cloud computing space, the release of Windows 8, its well received and critically acclaimed tablet entrant, Surface, and the promise of a “bigger, faster, stronger” version of its Windows Phone OS, are all very encouraging prospects for revenue and earnings growth in the years to come. However, it is unclear if these efforts will be enough to reignite the stock price gains of yore. Hence, it is conceivable that Microsoft may have officially fallen from grace as an exciting and compelling growth story. Still, there is nothing wrong with being simply a good, safe choice for the risk-averse buy-and-hold investor.
At the time that this article was written, the author held no positions in any of the companies mentioned.