Join        Login             Stock Quote

Why We (Still) Own Microsoft

 June 09, 2011 02:26 PM

A week ago, after Microsoft's acquisition of Skype was announced, my friend Jacob Wolinsky wrote an article about why he sold Microsoft. Since we still hold Microsoft in our capital appreciation portfolio, I thought I would write about why we still own it.

First, let me be clear. Jacob and I agree on a lot of things when it comes to Microsoft. Skype was a terrible acquisition. Steve Ballmer is not a good CEO of Microsoft; and Bill Gates, its Chairman of the Board, should stick to running his charity. We agree on the economic moat Microsoft has and that the stock is cheap. But I believe the economic moat Microsoft has far outweighs the idiocy of the two captains running the ship. As Warren Buffett has said, "I try to buy stock in businesses that are so wonderful that an idiot can run them. Because sooner or later, one will."

[Related -Microsoft Corporation (MSFT) Earnings Preview: What To Watch In Q2 Results?]

The list of failed acquisitions and product blunders under Ballmer's tenure is long and stunning:

(1) aQuantive for $6B in 2007, which is still losing money; (2) Danger for $500M in 2008, which is now essentially shut down; (3) Groove for $171M and the reason they bought it, Ray Ozzie, is now gone; (4) Placeware for $200M in 2003, which they turned into Live Meeting and are now phasing out in favor of Lync Online; (5) Massive, an in-game advertiser, for $280M in 2006, which was shut down last year. There's no doubt about it, billions of dollars of shareholder capital have been squandered.

[Related -Microsoft Corporation (MSFT): Good Buy or Good-Bye?]

And what about internal product development? That is beset by a long list of colossal failures as well. Windows ME and Vista were absolutely horrible with Windows ME being quite possibly one of the worst operating systems ever. Zune, Kin, Bing, Windows Mobile can be added to the list of terrible products relegated to second or third tier status by other competitors.

With such a terrible 10 year record, it shouldn't be surprising that Microsoft's business has floundered. Customers have deserted them in droves and the company is at death's door. Wait a second, that isn't what happened. In fact, the business results for the last 10 years haven't been half bad.

(all values in millions)

Revenue has grown 172% (11% compounded). Net Income has almost doubled (7% compounded). The core business is even more efficient with an ROA after excluding Microsoft's cash hoard of 38% versus 33.2% from 10 years ago. Even traditional ROA shows a modest improvement. In fact, despite the best efforts of Steve "The Destroyer of Shareholder Value" Ballmer's best efforts, Microsoft has proved quite resilient.

Most people's frustration with Microsoft stems from the price they paid. During the early part of the last decade, Microsoft regularly changed hands around 100, 50, 40 or 30 times earnings. With better management a multiple of 30 early in the decade may have been justified (barely) but nothing more. Now Microsoft trades at rock bottom prices. We might be stuck with Ballmer for another decade. If this decade turns out like the last one, Microsoft will have been an absolute steal at these prices.

The question of management's capability always poses an interesting conundrum to investors. Bruce Greenwald frames the management argument this way. Should good management lead to a higher multiple? Of course it should. Better management reinvests earnings more wisely and earns a higher rate of return. Should good management lead to a lower multiple? Of course, the managers have been good for a long time and the results are built into the business. Good managers have only one way to go and that is down.

With my investments, I choose to go the Warren Buffett route. I try to buy businesses that are so wonderful not even a Steve Ballmer can kill them. In fact, Warren himself even said he would buy Microsoft if he wasn't a close friend of Bill Gates.

Like a ship, Microsoft is sound; it's the captain Ballmer that is the problem. Hopefully we can mutiny soon. If not, at least we are in a seaworthy vessel.

Disclosure: Long Microsoft



Comments Closed

rss feed

Latest Stories

article imageBogle Says Indexing Destined To Win The Battle Of The Quants

Vanguard founder John Bogle gave a powerful speech last month at the Q Group’s Spring Seminar that lays out read on...

article imageVMAX and VMIN Poised to Be Most Important VIX ETP Launch in Years

REX Shares is launching two new VIX exchange-traded products on Tuesday in what is likely to be the most read on...

article imageThe April 29 Gold Triangle Breakout Update

If you’re just watching stocks, you may be missing this powerful Triangle Breakout surge in read on...

article imageSell In May, But It Is A Presidential Election Year

With May just around the corner, articles covering the "Sell in May' phenomenon are not in short supply and read on...

Popular Articles

Daily Sector Scan
Partner Center

Fundamental data is provided by Zacks Investment Research, and Commentary, news and Press Releases provided by YellowBrix and Quotemedia.
All information provided "as is" for informational purposes only, not intended for trading purposes or advice. iStockAnalyst.com is not an investment adviser and does not provide, endorse or review any information or data contained herein.
The blog articles are opinions by respective blogger. By using this site you are agreeing to terms and conditions posted on respective bloggers' website.
The postings/comments on the site may or may not be from reliable sources. Neither iStockAnalyst nor any of its independent providers is liable for any informational errors, incompleteness, or delays, or for any actions taken in reliance on information contained herein. You are solely responsible for the investment decisions made by you and the consequences resulting therefrom. By accessing the iStockAnalyst.com site, you agree not to redistribute the information found therein.
The sector scan is based on 15-30 minutes delayed data. The Pattern scan is based on EOD data.