) is looking more and more like a stock ready to take off. I say this as it appears to have the three things a stock needs to provide outsized returns. First, its valuation is very compelling. Since I have covered this before
, I won’t spend more time on that aspect. More importantly, Microsoft for the first time in a very long time has momentum and sizzle.
Microsoft had been underperforming the S&P all year. In fact, it has been dead money for more than a decade despite consistently growing earnings, revenues and cash over that time frame. However, over the last month, Microsoft has handily outperformed the S&P after bouncing off an important bottom in the $24 range in the recent market slump. I believe this is the start of a long term period of outperformance versus the market overall.
For the first time in a long time, MSFT is getting a lot of favorable news on a variety of fronts that is slowly causing investors to consider it in a different light — that of an exciting growth stock. Consider the following events over the past month or so.
Its new acquisition of Skype was a major coup when it was announced that Skype would be the engine behind Facebook’s new video chat feature. This adds potentiallt 750mm users to Skype’s 170mm current customers.
Highlighted by this announcement was Microsoft’s ties with Facebook, which is a compelling partnership. Microsoft bought a small stake in Facebook in 2007 and is a primary partner of Facebook for internet search as well.
The tax amnesty movement for overseas corporate cash is gaining momentum. Given that over 80% of Microsoft’s cash and short term investments are held overseas, this has the potential to allow Microsoft to repatriate its cash at a low tax rate. It could use that excess cash to increase its dividend and/or its stock buyback program.
Microsoft Office created a subscription model offering with the launch of Office 365. This moves Microsoft into cloud computing and the product will be targeted at small and medium businesses. This gives Microsoft some cloud computing buzz and access to new customers, and could be a great way to control piracy, especially in emerging markets.
Oracle (ORCL) announced a huge lawsuit against Microsoft’s chief rival, Google (GOOG), around its Android operating system. This will be yet another distraction for Google.
Speaking of slaps to the face of Google, Microsoft and Baidu (BIDU)announced a partnership in which Microsoft will handle the English language searches for Baidu. Google’s experience in China was a disaster and it eventually had to move off the mainland to Hong Kong.
Rumors are rampant that Windows 8 will actually be launched early, which would be an unusual event with an operating system.
Microsoft-enabled Nokia (NOK) phones will be launched by the end of the year, according to Nokia’s CEO.
This is a huge amount of significant positive events for a year, let alone a month. This makes me even more positive on Microsoft in the short- and medium-term. Microsoft still trades under $27 a share. I see MSFT at $37.50, 15 times my estimate of the roughly $2.50 in EPS I see it hitting in 2012, in the next 12-18 months.
I am long MSFT
via Microsoft: Adding Sizzle to the Steak – Seeking Alpha.