Microsoft, Intel, and Cisco Systems, once the darlings of Wall Street, had all fallen out of favour. Even though they have protected their turfs well, and are piling cash into their companies quarter after quarter, their stocks had languished for an entire decade and all of them are now trading at single digits forward P/E ratios.
The problem of the troika was that they are no longer perceived as growth stocks anymore, as each had performed poorly to expand beyond their core businesses. However, even though the troika are no growth stocks anymore, they are now perceived by many investors as undervalued. They are very different from fallen giants such as Nokia or Research in Motion in that they had defended their core businesses very well, and suffer no great market share declines as the others did. Each has their own problem, but they still have tremendous resources, and has the potential to recapture their glories if they play their cards right. There are many articles on the web focusing on their financials to illustrate why they are undervalued, but we will examine what they can do to allow them to grow again.
Micorsoft could have dominated every aspect of today’s emerging technology – search engine, cloud computing, mobile computer, etc., but it missed the chance in every single category. While PC still dominates in market share for personal computers, its growth in consumer sector has been stampeded by the rise of Apple, and its great expectation of growth in Netbook is now decimated by tablet computing. Its mishaps in mobile computing and search engine were illustrated by its scraping of Windows Mobile platform to be replaced by Windows Phone 7 (soon to be Windows Phone 8), and its MSN search getting replaced by Bing.
Even though Microsoft got attacked relentlessly on the consumer front, it still remains the giant in enterprise computing with Windows and Office, allowing the company to rake in billions of profits each quarter. This has enabled Microsoft to pour its resource to keep trying at cracking the missed opportunities.
While Microsoft needs to do better in search engine and clouding computing to counter Google, the biggest headache for Microsoft is in mobile computing. The size of smartphones and tablets could eclipse desktop computing, and Apple and Google are taking both market share and mind share right now, leaving a trail of road kills such as Research in Motion and Nokia in their paths. Therefore, for Microsoft to reclaim its significance, it must thrust itself into the mix and become a significant player in the market. To achieve this, it has dropped its antique Mobile Windows and developed Mobile Phone 7, which got good reviews but had not make a dent in the market.
To reclaim its significance in mobile computing, Microsoft struck an alliance with Nokia and moved to acquire Skype. These are good first steps, but Microsoft would need to fortify its offering by courting developers to fill up its app store. Besides providing a well integrated platform, it will probably need a killer app, much like Halo for the XBox, to really stoke the interests for users. It may even have to give special incentives to carriers, either in carrying Windows phones and/or profit sharing in app stores. The bar is high, but we believe it’s not impossible for Microsoft to overcome.
With a forward P/E between 9.0 and 10.0, and a dividend yield of ~2.5%, we believe its worthwhile to take a position in Microsoft at its current price range, and wait for Microsoft to crack the growth market in mobile computing. After all, Windows did not win until its 3.0 version.
This article originally appears on benzinga.com
Daniel Ho is the founder of 10xreturn.com, a financial portal providing financial information and market statistics for investment professionals.
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