The technology sector is normally a hit with Wall Street analysts and risk taking investors. You can always find some expert that is bullish on the futures of Google and Apple and for good reason. Technology stocks have massive amounts of cash that they reinvest into their company’s growth which give investors the chance for capital appreciation. There are some large cap tech stocks that have failed to live up to the sector’s reputation. Let’s take a look at a technology stock that has been a laggard for so long that the company may need to become a dividend stock so that investors can get some kind of return.
I have been reading analyst reports stating that Microsoft is likely to double from its $25 price level to $50. I find this incredibly hard to believe.
What about Microsoft?
Mr. Softee has been a “value stock” since the year 2000 and hasn’t been able to ever reach the price targets that analysts have placed on it. Microsoft (MSFT) has everything that a value stock could contain. The company has a low P/E ratio, low levels of debt, strong cash flow, and a high return on equity. None of this has mattered as the stock has struggled to just tread water.You can look at a 1 year, 5 year, or 10 year chart for Microsoft and the results are the same: NEGATIVE.
Another sign that the company is transitioning is the dumping of shares by Steve Ballmer and Bill Gates. Ballmer has sold $1.3 billion dollars worth of shares recently and Gates has sold over $1 billion dollars himself. (Gates and Ballmer both still have very large positions in Microsoft). The sales were not structured previously announced sales either. Selling off a tech stock when it’s trading cheaply and is supposed to be trading at a low valuation isn’t exactly a huge sign of support for the tech giant.
Microsoft’s greatest value is in the company delineating its most successful divisions from its least successful divisions. Microsoft’s Office, Server and Tools, and Windows divisions are the three most profitable for the company. Entertainment and Devices, and Online Services bring up the rear currently accounting for a miniscule portion of its earnings.
The company is banking much of its future growth on search and mobile software.
Its search component Bing is turning out to be a success with the company gaining nearly 14% of the United States search market. Bing has almost surpassed Yahoo search in a short period of time. Yahoo has just under 16% of the search market. Microsoft could conservatively own 25% of the search engine market. If the company bought Yahoo, the company could easily take almost one third of the market.
Microsoft has invested heavily in its Windows Live Mobile operating system with the company hoping to grow its earnings due to its deal with handset maker Nokia. Nokia’s market share may be dwindling but the company is still a major player in the handset market. Microsoft is hoping to build on the success of the Kinect by using it in multiple applications.
Weighing both the good and the bad of the company, I am still tempted to remain on the sidelines with Microsoft. I had owned this stock for years and saw very little in terms of price movement. I need to see growth catalysts take shape and the stock actually move before I will invest in Microsoft again.
Now if Microsoft is willing to break the company up or boost the dividend substantially, I would be a buyer again.