Credit: Shutterstock photoIn an era of the 24 hour news cycle and of media saturation it is easy sometimes to lose sight of the quiet performer. Some stocks just continue to grind on upwards but rarely seem to attract the attention that maybe they deserve. Such is the case with Microsoft (MSFT). Go back 15 or 20 years and Microsoft was all anybody wanted to talk about. They were the groundbreaking tech company that couldn’t stop growing.
Then, as the company reached maturity the narrative changed. I guess the old adage that “familiarity breeds contempt” was evident as conventional wisdom became that MSFT was “boring.” Even when they made major changes, the media and the markets greeted them with a huge yawn. Back in February, for example, when the company initiated a major shakeup of their board, I pointed out that the unenthusiastic reaction of markets to the appointment of Satya Nadella could be viewed as a good thing.
Microsoft (MSFT)
With hindsight, of course, that now looks to be the case, but at the time there was no shortage of people who saw it as a disappointment. The stock fell on the news of Nadella’s appointment and comments on the positive articles I wrote at the time were all of the “...Bing bad, Surface a failure, death of the PC, growth a thing of the past...” variety.
That is no great surprise, but what is amazing is that the success story that has followed has received so little coverage. Microsoft sales are growing at an annualized rate of over 25 percent again and the stock is up over 30 percent in the ensuing 7 months, well over double the increase in the broader market during that time. The other remarkable thing is that, despite that success, Microsoft is still cheap. Despite rising sales and profits Microsoft still trades at slightly below the market average Price to Earnings Ratio (P/E) on a forward basis. For a tech company in a growth spurt that is a serious discount.
This week, MSFT has once again been in the news, but rather than looking at the success story that the last year or so has become, criticism of the company for paying $2 billion for Mojang AG, the maker of Minecraft, has been the most common theme of the coverage. I understand that $2 billion for the maker of one game seems like a bit of a stretch, but that one game has shown great staying power. It is still in the top three sellers consistently after 5 years of success.
Even so, that isn’t the point. Acquisitions such as that of Mojang are beneficial to the company in ways beyond just the game’s sales. Exclusivity for X-Box, either of certain features or even the game itself in some cases, makes the purchase of the game company a potential driver of console sales. The fact is that if Microsoft approaches expansion in the gaming sector with an acquisitive frame of mind, competitors should be worried. With $85 billion of cash on hand and free cash flow of around $18 billion, Microsoft has the buying power to dominate if it so chooses.
I don’t see that particular purchase as a negative at all, but it is a distraction. The real driver of Microsoft’s future and what I see as continued gains in the stock is the fact that they are uccesfully splaying catch up in the two areas that disappointed over the last few years, mobile and enterprise business. Innovations such as the recent partnership with Salesforce (CRM) show that they are continuing to pursue growth in those areas.
Those focusing on the purchase of a Swedish game company are missing the point. Microsoft is relatively inexpensive and is pursuing an aggressive growth strategy of which gaming is only a part. Conventional wisdom, though, is that they are still a staid, lumbering giant. Nothing could be further from the truth, but that continued perception suits me and other holders of the stock. The short term media coverage is on the value or otherwise of a particular acquisition and while some are distracted by that, MSFT can continue to grow and appreciate at a market-beating rate.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
