Microsoft (MSFT) Sector: Technology 10/20/10
Intrinsic Value Current Price 52 Week Range P/E Ratio Market Cap Dividend Yield
$36-$38 $25.33 $22.73-$31.58 12.02 219.02 B 2.5%
Business Summary
Microsoft operates in five segments: Windows & Windows Live Division, Server and Tools, Online Services Division, Microsoft Business Division, and
Entertainment and Devices. Microsoft is the largest independent maker of software. It develops and sells software products for a wide range of computing
devices. Revenue sources in fiscal 2010: Microsoft Business are 29.8%; Windows & Windows Live, 29.6%; Server and Tools, 23.8%; Entertainment &
Devices, 12.9%; Online Services are 3.5%.
Industry Trends
PC shipments increased 7.6% in the Q3 2010 compared to the same period last year.
Emerging markets allow superior opportunities for application software to expand its customer base.
Cloud computing is becoming the focusing initiative of the technology sector which is expanding across each companies business model
Company Specific Strengths
Exhibits a strong correlation between revenue growth and growth of PC purchases from original equipment manufacturers who pre-install
windows operating systems which contribute to 80% of Windows division revenue.
Significant investment in emerging markets, part of a greater international growth strategy.
Microsoft has aligned multiple hardware vendors and dozens of global carriers to offer Windows Phone 7 devices. By 2011 all four national
carriers in the U.S. will have the phones.
Microsoft's strategy to sync XBOX Live with Windows Phone 7- potential for differential positioning against Android and iPhone phones
A combined market share of about 30% gives Bing/Yahoo! a stronger foothold from which to challenge Google's dominant market position.
Company Specific Threats
Antitrust Conflicts and negative outcome of ongoing Federal and International litigation
Microsoft has serious brand challenges as it is competing with Google and Apple for consumer devices often purchased for their stylish factor.
Valuation Assumptions
BV growth Rate 8.5%
Expected Return 15%
WACC 10%
PE 16x
Acquisition Price: <$27.00
Financial Ratios
Beta .8
ROE 40.6%
Operating Margin 43%
Debt to Equity 0.11x
Price to Book 4.71x
Competitors Forward P/E 12.05x
Apple Inc. (AAPL) PEG 1.04
Google Inc. (GOOG) Current Ratio 3.86
Oracle Corporation (ORCL) ROIC 37%
Earnings Yield 8.85%
Report Created By: CF Yield 14.76%
Jonathan Jenson FCF Yield 10.16%
Brandon Singer
Ben Hochron