Microsoft (MSFT) May Be Value Play, But Still Kinks to Work Out - Barron's

June 20, 2011 1:45 PM EDT
Microsoft (Nasdaq: MSFT) is looking strong Monday following a report from Barron's over the weekend which argues Wall Street is missing the boat on the tech giant.

Though flat for much of the last decade or so, Microsoft is trading at about 10x FY11 EPS estimates, slimmer than the 15x Google (Nasdaq: GOOG) is currently going for. Microsoft might trade at about 7x if factoring roughly $5.78 per share from net cash and investments, according to Barron's.

Microsoft also holds about $50 billion in cash, meaning the company could choose to boost its dividend or enhance buybacks (though the company is currently in the middle of a $40 billion buyback plan).

Recently, hedge fund titan David Einhorn said Microsoft should evaluate a number of strategic alternatives for its Search business, including a sale or joint venture. While Einhorn likes Microsoft, he called for the removal of CEO Steve Ballmer at the Ira Sohn conference at the end of May.

While Microsoft dolls out about $9 billion per year for R&D, critics point to rival Apple (Nasdaq: AAPL), which spends 78 percent less at $2 billion annually. Supporters argue Microsoft's cash is spent mainly to develop its Windows platform further, the primary revenue driver for the Redmond, WA-based company.

Ballmer has also been berated over the last decade for missing two key trends: Internet search and mobile phones. Microsoft is now trying to mend the wounds, partnering up with OEM leader Nokia (NYSE: NOK) in an effort to expand its mobile reach. But busting the duopoly of Google and Apple as the world's leading mobile OS providers is a tough nut to crack.

But Ballmer isn't all bad, Barron's contends. He tripled Microsoft's sales and earnings since taking over in 2000. Operating cash flow is up 17 percent to $8.7 billion compared with last year. Microsoft's Azure cloud-computing initiatives are also showing promise.

Microsoft has tried some M&A to get ahead, paying $6 billion for aQuantive in 2007 and making a $33 per share bid for Yahoo! (Nasdaq: YHOO) in 2008.

The focus is now on Microsoft's $8.5 billion acquisition proposal for Skype. Barron's notes Skype would benefit Microsoft in several areas, from voice communication in video games to videoconferencing for its enterprise solutions.

Barron's also alludes to how Microsoft is reluctant to sway away from its Windows platform, making sure all new products are tied in. However, it's one success, Xbox and Xbox 360, hasn't been a Windows based device.

Moving forward, one of the key things which will make investors meander back into the stock is Microsoft's mobile game plan at its analyst meeting.

Barron's offers a way to unlock shareholder value: spin-off the consumer division, which includes entertainment and online services. Leave Microsoft made up of Windows, Office, and the server and tools group unit.

Though Ballmer has said he doesn't plan on stepping down until his youngest enters college (about eight-years from now), speculation surrounding a potential departure following the success or failure of Windows 8 has been raised.

Microsoft shares are up just over 1 percent to $24.55 Monday afternoon.

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