Is Microsoft a Growth Stock? »
Wednesday, May 24, 2006 | Wayne MulliganRating:
When I think of the greatest growth stories of the 20th century, there's a certain software company that comes to mind. Come on … you know the one I'm talking about.
The company that grew from 2 employees in a Harvard dorm room to the largest - and one of the most profitable - technology companies on the planet.
The company that powers over 90% of the Personal Computers in the entire world.
That's right. You know that I'm talking about Microsoft Corp. (Nasdaq: MSFT).
And when I say "growth story," let me show you exactly what I mean. Over the past 20 years, Microsoft's stock has risen by over 20,000%!
Just to get a clear picture of how phenomenal that is, do me a favor and go to Yahoo! Finance. Pull up a chart of Microsoft (set the chart Range to "Max"). Then compare it to the Nasdaq.
You'll see how Microsoft's growth has clearly outpaced the broader tech sector.
However, you'll also notice that the stock has pretty much stalled over the last 5 years.
Instead of the high double-digit growth rates investors had become accustomed to, more recently Microsoft has been showing less than stellar sales and profit growth. The latest quarter showed sales and earnings growth of 13% and 16%, respectively.
It's obvious that their growth has slowed a bit; but it has still been adding to its cash hoard and improving a number of its product lines. And at a P/E of 18, there are plenty of folks who would call Microsoft a value stock at these prices.
But if I were to buy Microsoft right now, it wouldn't be as a value play - it would be because Microsoft has the potential to become a growth stock again … the potential to grow at rates that the company hasn't seen since the PC revolution.
How Microsoft Became Microsoft
One of my closest friends and mentors always told me that the easiest way to become successful in business was to be a "student of history." He couldn't have been more right.
In order to understand how Microsoft will jump-start its business again, we need to understand how the company fueled its growth to begin with. So let me tell you a little story …
Once upon a time, in a land far, far away … scratch that, let me just skip right up to the advent of the Personal Computer.
Once it became obvious that computers were no longer solely the domain of researchers, academics and hobbyists, Microsoft knew that the key to conquering this market would be to develop a low cost operating system that would power all of the new personal computers.
At the time, Apple Computer (Nasdaq: AAPL) dominated the PC market. However, Apple focused on both the hardware and the software. Microsoft had the foresight to see that the hardware was becoming commoditized and the software was where the real value was.
What I mean by that is that Microsoft knew there was no difference between a personal computer made in Japan and one made in the U.S. The inside of the computer was the same, regardless of the manufacturer, and therefore the prices of the computers and components would eventually drop.
Fast forward to today, and you can see how the company's original vision paid off handsomely. Microsoft boasts a market capitalization (shares outstanding times share price) of almost a quarter of a trillion dollars, and has made its founder, Bill Gates, the richest man in the world - Good job guys!
How Microsoft will Grow Again
Ok, so in a nutshell, here are the key elements behind Microsoft's growth so far:
- Increasing popularity of the Personal Computer
- Commoditization of hardware - standard parts and falling prices
- Focus on providing a low-cost operating system
In my opinion the answer is right in front of our faces - better yet, right inside the palm of our hands - mobile phones!
As I write this article, I'm watching Ed Zander, the CEO of Motorola (NYSE: MOT), show off Motorola's new Q Smart Phone. One of the key features is that the phone is powered by the Microsoft operating system, "Just like the PC in front of you," exclaims Zander.
Then, I take a quick look at my Palm (Nasdaq: PALM) Treo and see that it's also powered by Windows Mobile.
While worldwide PC shipments are slowing, mobile handset shipments are increasing at a very rapid pace. Mobile phone shipments grew by roughly 20% in 2005 (800 million units total).
The same dynamics that took shape during the PC revolution are taking shape right now in the mobile device market … falling hardware prices, increasing popularity of the devices themselves, and Microsoft waiting in the wings to provide a low-cost operating system to the world.
With Microsoft supplying software to a market that is larger and growing considerably faster than the PC market, it's obvious the company is once again in a position to grow at an incredible rate.
As long as Microsoft continues to provide a stable, low cost operating system for mobile devices, the growth of their revenues, profits, and stock price will take care of itself.
And even if it takes a bit longer for Microsoft's new growth engine to kick in, I can't see anybody getting too hurt buying MSFT at these prices for a longer term hold.
Until next week …
(Please let us know what you think about Wayne Mulligan's article.)
Rate his article here »
Rate his article here »
Wayne Mulligan
Contributing Editor
The Tycoon Report
