Microsoft Corporation (NASDAQ:MSFT) has been in the business news with increasing frequency as this 800 Pound Gorilla Tech stock appears to be awakening from a long and peaceful slumber. Perhaps because they were content with a never-ending stream of licensing income, MSFT for the better part of the last decade or so has been stumbling around like a parody in search of its former self. Product rollout after product rollout – both hardware and software – yielded little more than bugs, crashes, and an increasingly bad reputation. So what’s going on and is this a good time to get back on the Microsoft bandwagon?
Let’s analyze the stock with the relevant sections of our CHEAT SHEET investing framework.
C = The Surface Rollout as a Catalyst
While most of us think of a catalyst as a single event that drives a stock price gyrating upward, or downward, there is another way to think of what constitutes a catalyst. Catalysts can take the form of a series of actions or events that taken together and over time will move the stock. If you look at recent history MSFT finally appears to be getting things right. Windows 7 rollout was seamless and well-received and early indications are Windows 8 should be another success.
After a series of catastrophes from the ill-fated Zune to the “Red Ring of Death” disaster with early X-Boxes, Microsoft actually knocked Nintendo’s Wii off its perch with the critically acclaimed and commercially successful Kinect Sensor. Now along comes the Surface putting MSFT in toe-to-toe combat with Apple (NASDAQ:AAPL), Amazon (NASDAQ:AMZN), Google (NASDAQ:GOOG), and Barnes & Noble (NYSE:BKS). The real catalyst here is not any one of these individual actions, but the underlying change in Microsoft’s business model. They are moving into the hardware space and they have the resources to make a splash.
H = High Quality Pipeline
Skeptics who make light of the Surface given the market dominance of Apple’s iPad overlook something that is obvious to anyone who uses computers for work applications. As good as it is, there are a lot of things you cannot do with an iPad. While the jury is still out, the Surface has the potential to be a bona-fide replacement for both desktop and laptop PC’s which the current iPad is not.
While Microsoft’s attempts to get into the Smartphone space have yet to bear fruit, the pipeline to watch is the applications of the Kinect Sensor technology. Supposedly Microsoft has some top notch geeks working on things like a personal avatar with which you can actually try on clothes while online shopping.
E = Equity to Debt Ratio is Close to Zero
In a market environment where some doomsday prophets expect another Lehman-like credit freeze, companies with no debt offer some level of safety. Debt in and of itself is not a bad thing. What counts is the ability of the company to stay current with debt repayments. Credit freezes make it difficult if not impossible to restructure long term debt and find any source of short term borrowing. Microsoft’s Debt to Equity Ratio of 0.17 is almost as close to Zero as you can get. Their total debt (most recent quarter) is around $13 Billion, but with approximately $58 Billion cash on hand, MSFT can weather any storm.
A = A-Level Management Runs the Company
While Steve Ballmer has his critics, he appears to be now doing what far too many CEO’s of once dominant companies failed to do. Regarding the growth of software licensing for traditional PC products, the handwriting is on the wall. And Ballmer looks like he finally sees that as he works on shifting the company’s business model.
T = Trends Support the Industry in which the Company Operates
Who can argue that technological innovation is not driving companies looking for the elusive next big thing? Microsoft is reinventing itself in an industry expanding at a staggering rate.
Microsoft is one of the world’s premier tech stocks with the added attraction of a modest but stable dividend yield. What’s not to like about this stock right now? For you skeptics, you might want to add MSFT to your watch list and keep an eye on their efforts on getting into the hardware space.
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