MSFT earnings up, stock down. What do investors want?

Post de ontem do blog de Don Dodge (http://www.dondodge.typepad.com/), que é ex-Microsoft,  sobre sua ex-empresa!

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MSFT earnings up, stock down. What do investors want?

Microsoft reported record revenues and profits for the quarter and fiscal year. Yet, the stock (MSFT) is down again. What does Wall Street want from Microsoft? I think the problem is that Microsoft still considers itself a growth company, while Wall Street considers it a Blue Chip stock that should pay a higher dividend. Take a look at this 5 year graph of MSFT. The stock price is just about exactly where it was 5 years ago.

msft5year

Now look at Microsoft financial results five years ago. They had revenues of $39.8 Billion, Net Income of $12.2B, and Earnings Per Share of $1.12. They had $37.7B in cash. For 2010 Microsoft reported revenues of $62.5B, Net Income of $18.8B, and EPS of $2.10, with $36.8B in the bank. Revenues and earnings are up about 50%, and earnings per share are up nearly 100% due to stock buy-backs. Those are impressive increases across the board, yet the stock price hasn’t moved. Why?

Wall Street prices stocks based on future potential, not past results. High growth stocks typically sell for 25 to 35 times earnings. Microsoft has a price to earnings ratio (P/E) of just 13.7, very low for a leading technology stock. By comparison, Apple (AAPL) sells for 22 times earnings. Therein lies the problem. Comparisons.

Investors have many choices in where to put their money. Comparing Apple to Microsoft in terms of future growth prospects, product pipeline, and most importantly, pricing power, Apple wins. Microsoft is a consistent power house, growing revenues and earnings every quarter, but not enough to satisfy the growth needs of investors.

Wall Street views Microsoft more like IBM, a stable Blue Chip stock with a nice dividend. IBM’s P/E is 12 versus MSFT’s 13.7. IBM’s dividend yield is 2.0% identical to MSFT’s 2.0% yield. Wall Street came to the conclusion that Microsoft is a Blue Chip ten years ago. This chart of the past 24 years tells the story. Microsoft was a growth stock from 1986 to 2000. But, the past 10 years it has flat lined.

msft24year

Maybe Microsoft should accept Wall Street’s conclusion that it is really a Blue Chip stock and stop acting like it is a growth stock. Maybe they should listen to Mini-Microsoft and cut expenses significantly, focus their product development efforts, and increase their dividend.

Blunders like the Microsoft Kin phone that cost them $500M, and billions more poured into Bing search efforts, don’t contribute to growth or profits. Billions more spent on acquisitions that didn’t work out are another big drain on cash and profits. Microsoft doesn’t need to do anything fancy. Imagine what the financial results would be if they stripped away all the needless spending in pursuit of elusive growth. Imagine how much cash they would have available to pay dividends to investors if they didn’t keep spending billions on questionable acquisitions. Microsoft spends billions every year on pure research in labs all over the world. It is hard to trace any of that spending to commensurate revenue increases.

Wall Street has concluded that MSFT is a Blue Chip, and hasn’t changed its mind in 10 years. Microsoft is still investing and acting like it is a growth company. Something has got to change. Don’t bet on Wall Street changing. Your move Microsoft.

Disclosure: I don’t own any Microsoft stock. I sold it all last year. However, I do wish the best for all Microsoft employees and shareholders.

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