MSFT - Microsoft

[Palantir]

A big part of Windows RT was Steve Sinofsky being an ass, now that he's gone, MS can junk RT and make a unified windows system across PC's and tablets...

 

Furthermore, Surface Pro doesn't really even compete with the iPad to begin with.

 

Awesome. Maybe you should look at PC sales to see what the iPad is really competing with.

 

...and you change the topic. Good.

[Guest wellmont]

I see the pattern. You make a point, I refute it, you ignore it to fit your agenda.

 

You and ValueInv should hang out.

 

come on this is an adult board. don't be sophomoric.

[Guest valueInv]

A big part of Windows RT was Steve Sinofsky being an ass, now that he's gone, MS can junk RT and make a unified windows system across PC's and tablets...

 

Furthermore, Surface Pro doesn't really even compete with the iPad to begin with.

 

Awesome. Maybe you should look at PC sales to see what the iPad is really competing with.

 

...and you change the topic. Good.

 

I didn't, you just didn't see connection.

Surface Pro is a PC class device. PCs are being replaced by tablets. The iPad is a tablet.

[texual]

Took a massive hit today. Never saw that coming. The report was actually pretty good. RT is a super small thing and yet it covered headlines? Whatever, not deterred. Continuing to hold MSFT through this, and don't see any reason to change my opinion on the company. Looking forward to XBOX, Windows 8.1, new Nokia Lumia's and great improvements in all their divisions.

[Palantir]

Took a massive hit today. Never saw that coming. The report was actually pretty good. RT is a super small thing and yet it covered headlines? Whatever, not deterred. Continuing to hold MSFT through this, and don't see any reason to change my opinion on the company. Looking forward to XBOX, Windows 8.1, new Nokia Lumia's and great improvements in all their divisions.

 

Yep, don't get it either.

[hyten1]

i just find it funny, sure msft miss so call "estimates"

 

but things are still "growing", yet some people are comparing msft to RIMM?! and/or NOK?!

 

you got to be kidding right

 

Sure PC sale will declining (note the definition of PC's, which does not include laptop that have detach keyboards etc. which run windows, also people have to understand msft ultimately care about the software not what its running on, it could be pc, hybrids, tablets whatever).

 

definitely things are changing/shifting, but that is nothing new.

 

 

 

 

[rpadebet]

i just find it funny, sure msft miss so call "estimates"

 

but things are still "growing", yet some people are comparing msft to RIMM?! and/or NOK?!

 

you got to be kidding right

 

Sure PC sale will declining (note the definition of PC's, which does not include laptop that have detach keyboards etc. which run windows, also people have to understand msft ultimately care about the software not what its running on, it could be pc, hybrids, tablets whatever).

 

definitely things are changing/shifting, but that is nothing new.

 

 

 

 

 

Yes nothing we didn't know earlier was disclosed. The "strong moat" business i.e. Servers, Business division are still growing and revenue is going to be more predictable and annuity like given customers are being converted to a subscription model.

 

Management still sucks! In my opinion they are doing too many things by chasing Google, Apple and IBM all at once. None of these things are unfix-able. The real question is when will they get to fixing it.

[Palantir]

I am a newbie to the value investing world, so I am still learning the basics here.

 

Current Mkt Cap: 267 bill ($32 price)

Net Cash & Cash Equivalents available on Balance Sheet: 72 bill approx (most of it is offshore, so lets assume the 30% discount)

So, Enterprise Value is 217 bill (267-72*0.7)

 

Free Cash Flow (2013 ): 24 bill (FCF Yield of 12.3%)

 

Here is my thinking on this.

Say these guys take on some debt, a very conservative banker should be willing to lend them against at least 1/3 of their FCF, i.e. The debt would lay a claim against 8bill each year. This gives the lender enough cushion should the Cash Flow decline. Assuming MSFT can borrow at even 4% (their 10Y debt currently seems to be trading around 3.1%), this means they can comfortably borrow 8bill/4%=200bill, which could easily be paid out in dividends to equity holders or used to by back stock.

 

In my opinion the current market prices imply that for 17 bill (217 EV- 200 Debt proceeds), shareholders can lay a non-contractual claim to 2/3 rds of the remaining Free Cash Flow of 16 bill. I understand that this 16 bill can decline if margins continue to compress, they keep taking writedowns on newly launched products etc, but paying just 17bill for that cash flow given the risks seems like a steal.

 

I am not saying MSFT will take on the debt and pay out the dividends, but this analysis illustrates the value in this stock to me.

 

Seniors on this board and more experienced investors please help me understand how anyone could lose capital investing in MSFT even now.

 

I'm a newbie too, but I agree with this. You could probably do the same thing for Oracle.

[rpadebet]

I am a newbie to the value investing world, so I am still learning the basics here.

 

Current Mkt Cap: 267 bill ($32 price)

Net Cash & Cash Equivalents available on Balance Sheet: 72 bill approx (most of it is offshore, so lets assume the 30% discount)

So, Enterprise Value is 217 bill (267-72*0.7)

 

Free Cash Flow (2013 ): 24 bill (FCF Yield of 12.3%)

 

Here is my thinking on this.

Say these guys take on some debt, a very conservative banker should be willing to lend them against at least 1/3 of their FCF, i.e. The debt would lay a claim against 8bill each year. This gives the lender enough cushion should the Cash Flow decline. Assuming MSFT can borrow at even 4% (their 10Y debt currently seems to be trading around 3.1%), this means they can comfortably borrow 8bill/4%=200bill, which could easily be paid out in dividends to equity holders or used to by back stock.

 

In my opinion the current market prices imply that for 17 bill (217 EV- 200 Debt proceeds), shareholders can lay a non-contractual claim to 2/3 rds of the remaining Free Cash Flow of 16 bill. I understand that this 16 bill can decline if margins continue to compress, they keep taking writedowns on newly launched products etc, but paying just 17bill for that cash flow given the risks seems like a steal.

 

I am not saying MSFT will take on the debt and pay out the dividends, but this analysis illustrates the value in this stock to me.

 

Seniors on this board and more experienced investors please help me understand how anyone could lose capital investing in MSFT even now.

 

I'm a newbie too, but I agree with this. You could probably do the same thing for Oracle.

 

 

I feel there is a higher chance of this actually happening with Oracle given the Larry Ellison factor. He likes to take Cash out of the business either as CEO or as owner :)

[Palantir]

Why do you say that? MS has returned tons and tons of cash. Now I'd like them to raise their dividend a tad, but they're on pace.

[rpadebet]

I am not saying MSFT isn't going to return Cash. They have done previously and are doing now. They should be able to comfortably raise their dividend and buybacks as well. Hopefully they do it next quarter. However I don't see them taking on debt on the scale i illustrated just to return cash to owners in the form of a special dividend or I don't see them being as aggressive in buybacks as DTV is.

 

I like the business they are in, especially the enterprise part. They should probably spin that off and lever it up financially a bit. This is a strong, growing and predictable business with good moats. The consumer piece is the one that gets all the attention, is in a decline and has some strong competitors. They don't seem to have a coherent strategy there.

 

Clearly, to realize the value in this company there is a need for a catalyst which is lacking at the moment. I am hoping it is in form of a spin off or C-suite change.

[Palantir]

What would be the benefit in spinning off their most valuable business? The stability and strength of this business allows them to invest in riskier projects like Bing. Furthermore, putting different lines under one house increases their interoperability and synergies.

 

Given MS's reorg, any spinoff is ruled out.

[wachtwoord]

I am not saying MSFT isn't going to return Cash. They have done previously and are doing now. They should be able to comfortably raise their dividend and buybacks as well. Hopefully they do it next quarter. However I don't see them taking on debt on the scale i illustrated just to return cash to owners in the form of a special dividend or I don't see them being as aggressive in buybacks as DTV is.

 

I like the business they are in, especially the enterprise part. They should probably spin that off and lever it up financially a bit. This is a strong, growing and predictable business with good moats. The consumer piece is the one that gets all the attention, is in a decline and has some strong competitors. They don't seem to have a coherent strategy there.

 

Clearly, to realize the value in this company there is a need for a catalyst which is lacking at the moment. I am hoping it is in form of a spin off or C-suite change.

 

I own a ton of MSFT (20% of my portfolio before the drop) and I don't want a catalyst. I look forward to accumulating more over the coming years. All the current shares I own are bought at an average price below 25.5 however so it'll have to dip quite a bit before I'll buy more (I already brought my average price up quite a bit with a purchase in January at just below $27).

[Guest wellmont]

the stock is not down because of the write off. the stock is down because Windows, their most important business, was Down 6% yoy.

[Palantir]

I don't understand the obsession with the writeoffs. They tried, they failed, it happens. Should they just roll over and give up? What do you expect them to do? Please don't say milk Windows cash flows and return them to shareholders, this is not a cig firm.

[A_Hamilton]

the stock is not down because of the write off. the stock is down because Windows, their most important business, was Down 6% yoy.

At ~1/2 the size of MBD what makes Windows their most important segment?

[rpadebet]

What would be the benefit in spinning off their most valuable business? The stability and strength of this business allows them to invest in riskier projects like Bing. Furthermore, putting different lines under one house increases their interoperability and synergies.

 

Given MS's reorg, any spinoff is ruled out.

 

Realizing the business and customer value is the most important benefit. It could also be argued that their most valuable businesses currently are currently subsidizing the riskier projects which mostly tend to lose money. There is little synergy between say Xbox and SQL Server and tools business or Azure business. At the very least the synergies are not that great that they cannot be replicated with a bit of cross licensing.

 

MSFT is not Google. I see google less as a software firm and more as an advertising technology firm. Most of their "riskier projects" are intended to collect consumer data so as to be able to expand their ad offering. They don't intend to make money directly of these projects, though sometimes (as in case of Play store) they do make some direct money. MSFT is trying to be Google with its BING, but without the advertising infrastructure Google has, I feel it is hard for them to make too much money anyway. Maybe if they had worked on Internet Explorer here when they could have it could have been a different ball game here. Their PC Windows business here, though declining rapidly now, could stabilize at a lower level and still be able to support these other ventures for sometime.

 

MSFT is not Apple. I view Apple as a consumer electronics company with in house software development. Their business is facing headwinds too because this is a highly competitive business where apparent moats are mostly an illusion. MSFT tried to be Apple with Zune, with Surface and with the Windows Phone. Only XBox here has shown some promise recently after the initial hiccups, but it is hard to make money of this business consistently too given the shift to casual gaming brought about by smartphones and tablets. 

 

MSFT is more closer to Oracle/IBM. In the enterprise space MSFT is a clear leader. Their products, Windows, Office, Outlook, SQL Server etc are entrenched deeply into many enterprises. It is herculean task for any decent sized organization to move away from it any time soon. This gives them the moat. This business has very few synergies with the consumer electronics business or the Search/advertising business. They need to invest here more and solidify this moat before others can take this away from them as well.

 

I view the other businesses as having very different risk profile and competitive dynamics compared to this. I don't see too many synergies which would be lost by breaking them up. Can you think of any which could be permanently lost because of splitting the businesses.

 

In my opinion, their recent reorg around Service and Devices, kind of tries to separate the businesses as I have done above to some extent. It is not far fetched to imagine them spinning off their Devices business or Services business once the profitability and business dynamics are clear to everyone.

[rpadebet]

I am not saying MSFT isn't going to return Cash. They have done previously and are doing now. They should be able to comfortably raise their dividend and buybacks as well. Hopefully they do it next quarter. However I don't see them taking on debt on the scale i illustrated just to return cash to owners in the form of a special dividend or I don't see them being as aggressive in buybacks as DTV is.

 

I like the business they are in, especially the enterprise part. They should probably spin that off and lever it up financially a bit. This is a strong, growing and predictable business with good moats. The consumer piece is the one that gets all the attention, is in a decline and has some strong competitors. They don't seem to have a coherent strategy there.

 

Clearly, to realize the value in this company there is a need for a catalyst which is lacking at the moment. I am hoping it is in form of a spin off or C-suite change.

 

I own a ton of MSFT (20% of my portfolio before the drop) and I don't want a catalyst. I look forward to accumulating more over the coming years. All the current shares I own are bought at an average price below 25.5 however so it'll have to dip quite a bit before I'll buy more (I already brought my average price up quite a bit with a purchase in January at just below $27).

 

I am at 7-8%, I want more too, before there is any catalyst! Like I said this was my first stock so didn't put a lot initially, hopefully it will come down to me more before it catches up to its value. I wish to make it closer to 20% of portfolio myself.

 

disclosure: I am long MBI,AIG,MSFT,NOV,MKL,CTSH,EXETF. Mostly thanks to the discussions on this board.

[Guest wellmont]

I don't understand the obsession with the writeoffs. They tried, they failed, it happens. Should they just roll over and give up? What do you expect them to do? Please don't say milk Windows cash flows and return them to shareholders, this is not a cig firm.

 

perhaps they should study ibm and oracle. msft should be focusing on the enterprise rather than throwing stuff at the wall. the reason people "obsess" about write offs is because they are reflection of destroyed value, malinvestment, and poor capital allocation.

[Guest wellmont]

the stock is not down because of the write off. the stock is down because Windows, their most important business, was Down 6% yoy.

At ~1/2 the size of MBD what makes Windows their most important segment?

 

I don't believe it's half the size. I think it's 2/3 the size. windows is the ecosystem facilitator. if that starts to go south office is sure to follow. in fact Office is in it's own massive (and risky) business transformation to monthly subscription model.

[rpadebet]

1.Windows division revenue: 19.23 bill

2.Server and tools revenue:    20.28 bill

3.Mbd revenue:                        24.72 bill

4.Rest:                                        13.37 bill

 

Rest includes bing,online services,Xbox and entertainment devices etc.

Division 1) is declining but cash cow. 2) &3) growing cash cows.

 

Makes one wonder if 4) is worth all the negative press, bad will, disproportionate advertising expenses and operating expenses. Granted its growing, but that maybe due to the very nice android licensing revenue cash stream msft gets being in there.

 

 

[VAL9000]

I think you can lump MSFT, DELL, HPQ, etc. under the heading "The Report of the PC's Death has been Greatly Exaggerated".

 

What's we're seeing is the bifurcation of the PC market into two substantial sub-markets: Consumer and Business.

 

Addressing consumer first, we can explain a lot of the weird activity that Microsoft has been up to.  PC sales dropping sharply are highly correlated to the success of the tablet market.  Most home PC use is casual in nature, and can be displaced by a tablet.  I'm talking about emailing, web surfing, and casual gaming.  Less casual activity (but not real work) offers two main options: Windows and Mac.  And then there are other home applications like gaming and media that are relatively niche.

 

Where Microsoft was previously dominant in all forms of PC usage, they are now losing the consumer battle in a pretty big way.  This ties to DELL and HPQ threads pretty directly - PC sales are dropping, but business is looking much better than consumer.

 

Microsoft's efforts with Surface/Surface RT and Windows Phone are generally attempts to keep Windows as the default platform for all forms of PC usage (including "post PC usage").  Obviously the Surface RT is a failure, but Surface is still possible.  Future Intel chips will likely close the gap considerably between Windows tablet hardware and iPad hardware.  The next version of Xbox will be the most Windows-y yet for this same reason.

 

Now, Microsoft is also hedging its bets by putting together programs like Office 365 or Bing as a web service.  Offering these services on cloud allows them to shift from an OS-level platform to a web-level platform.  That is, even if the consumer "PC" business gets away from them completely, they will still have revenue opportunities.

 

On the business side, I believe things are pretty stable for Microsoft.  PCs will continue to be used as they are for a long time.  There is a LOT of software that businesses run that just can't be moved off of Windows.  Think of any business that has an Excel Macro.  This just isn't portable.  It can't be replaced without a significant investment.  So while the shift from Windows software to web applications will erode the Windows moat, it will not be possible to move from Windows to, say, Mac or ChromeOS until every piece of software gets pulled out of those machines.  Kind of crazy when you think about it.

 

My conclusion is that you should break up the Microsoft business accordingly.  I'd forecast the business bits as stable revenue streams.  I'd forecast the consumer bits as complete wildcards.  Actually I'd forecast the consumer bits as losers just to be safe.  Surface, Windows Phone, Office (for consumers), Bing (for consumers) are all facing intense competition and appear to be money losers (except Office).  Xbox is in a good position, though.  We'll see how that does in the next console cycle.

 

I'm doing the same thing when I think about the PC manufacturers.  Consider the consumer business toast, but keep the business segment relatively stable (especially for Software and Services).

 

[Palantir]

What is the benefit to breaking it up? I keep hearing about breaking up MS, but I just don't see what the benefit is other than "well these are really different soo...". I see a lot of synergies between the consumer and enterprise business as frankly, I just don't see them as that separate of businesses, having the same operating system play across a range of different screens from Xbox, consumer phones and tablets to enterprise allows the creation of an ecosystem, and an ecosystem needs to be large.

 

I think the surface can be a good success, and furthermore, if OEMs don't want the WP, then they can themselves build their own Surface phone and totally vertically integrate that product. The Surface Pro looks nice though, may become my next laptop.

[Guest wellmont]

the benefit would be that current msft CEO would have less assets to manage and allocate. the stock would go up a lot if it was broken up. that's a benefit. but it's not to be. because the first priority here is not the shareholders. it's to keep msft "large".

 

What is the benefit to breaking it up? I keep hearing about breaking up MS, but I just don't see what the benefit is other than "well these are really different soo...". I see a lot of synergies between the consumer and enterprise business as frankly, I just don't see them as that separate of businesses, having the same operating system play across a range of different screens from Xbox, consumer phones and tablets to enterprise allows the creation of an ecosystem, and an ecosystem needs to be large.

 

I think the surface can be a good success, and furthermore, if OEMs don't want the WP, then they can themselves build their own Surface phone and totally vertically integrate that product. The Surface Pro looks nice though, may become my next laptop.

[Palantir]

Sigh.