Microsoft Provides Great Value at Current Price

Microsoft traded at a P/E ratio of 9.3 at the close of trading on August 12th, leading many investors to believe that its shares are undervalued. Microsoft has historically been a strong company and its is expected to have revenues growth of 6.7 percent for FY 2012 and 10.5 percent for FY 2013. Compared to some other large cap research companies like Google and Apple, its expected growth is relatively small, however Microsoft can after all provide a nice return to investors over the coming years. In this article, I try to explain why Microsoft is currently trading at such a low price and I will explain why MSFT is currently a great stock to buy.

Microsoft’s current revenues are generated by its past software innovations, namely Windows and Microsoft Office. It has not been able to control newer research markets that it has entered over the past few years, including the MP3 market and the smartphone market. Microsoft is very similar to RIM in that its current profitability may not be sustainable due to more innovative competitors grabbing market share. Innovations like Google Docs scare investors into believing that Microsoft will in the end lose its cash cows to new products released by its competitors.

Despite investor fears, Microsoft is making strategic moves to ensure that it continues to be profitable. Microsoft is making heavy investments in cloud computing, and I believe that it has a good chance at grabbing market share in cloud computing because its Office products can be utilized in new, value-added ways. With its recent acquisition of Skype for $8.5 billion, Microsoft showed how it is willing to invest in the social networking craze, enter new markets, and create more revenue streams. Microsoft is all in all making changes to its Windows Phone platform and, even though ambitious, it is even so trying to take market share away from the Android and the iPhone.

Like Apple and Google, Microsoft has a lot of cash. On its June 30th balance sheet, Microsoft reported Cash, Short-Term Investments, and Long-Term Investments of over $63 billion, which is more than $50 billion net of long term debt. I believe that Microsoft will use a significant chunk of its cash to make more strategic acquisitions so it can continue to enter new markets or integrate its supply chain in markets in which it currently competes. Since Microsoft has a market cap of over $210 billion, acquisitions of pursuant to this agreement $20 billion will not have devastating effects on its stock price.