When I think of Microsoft stock, images of Susan Boyle in "Britain’s Got Talent" come to mind. The Scottish woman appeared — middle aged, awkwardly dressed, unsure of herself, unattractive by conventional standards — and expectations of her singing were in line with her appearance. As long as she did not fall off the stage, the audience would have concluded that her performance was a success. If Susan Boyle was a stock, I’d call her a deep value stock with very low expectations, and thus a great margin of safety, selling at a discount to its fair value. Then she opened her mouth, and to everyone’s shock, this duckling had a beautiful swan of a voice. She became an overnight sensation. The video of her performance was YouTubed more than President Obama’s inauguration.

Then here comes Microsoft (MSFT). The company’s name doesn’t have the luster it once had. It's seen as middle-aged, overweight and slow, and it is believed by many that creativity retired with Bill Gates.

The sentiment is so horrible that there is almost universal expectation that it will not come up with another good product, ever. Kodak and Polaroid are now used to describe Microsoft’s “bright” future, and Apple and Google are the ones that will retire it there.

But the ugly duckling is about to sing, and it will be a Susan Boyle-like performance.

Vista's flop will lead to Windows success:

Microsoft is releasing Windows 7 sometime in late 2009 or early 2010. It's last operating system, Vista was a flop. Consumers did not care for the product and corporations did not upgrade.

Of course failure is a relative term when it comes to Microsoft. At its release, Vista sales were double that of XP, the previous version. Vista still commands almost 24% of market share, second only to XP’s 60% plus.

Windows 7 is not just another new release. It is really Windows Vista 2.0, or Vista-fixed, if you like. Microsoft took Vista’s kernel –- the core of the operating system — fixed it, made it faster, improved the interface and added new features, Voila, you’ve got a new multibillion dollar product.

Many corporations did not upgrade to Vista: they stayed with XP. This is now eight years old, a dinosaur in software years. Microsoft will eventually discontinue support and updates for XP. Unless all hackers “pinky swear” (my 8-year-old son’s favorite phrase) that they’ll not try to figure out a way to hack into the 400 million computers that run XP worldwide, a computer running could be left exposed to new security attacks.

Corporations will not likely take hacker’s “pinky swears”, they’ll have no choice but to upgrade to Windows 7. Also, this time they won’t have to do the usual thing and wait for Service Pack 2 — the inevitable set of bug fixes to the original product. Vista’s Service Pack 2 is already out, and in many ways Windows 7 is Service Pack 3. Expectations created by Vista for Windows 7 are incredibly low for Microsoft, but 7’s success is likely to be very high.

Other reasons to go Bin:

There's more: Aside from Windows 7, there is plenty of promise in other products that are not built into Microsoft's stock. Bing, a new, improved search engine, is just out and the presentation I’ve seen of it is very impressive. Office 2010 will bring a subscription-based office onto the Web which may fix a longstanding consumer piracy issue. (I personally don’t know a single person who actually bought a copy of Office for home use. Maybe I need new friends, but people just don’t want to pay $300-400 for something that we consider our birthright. )

With Office Live, Microsoft will charge an annual fee, and you’ll get a Web product that has the same look and feel of the Office you are used to using at work.

This ugly duckling is not hanging by a thread. Microsoft still has Windows, server products and Office, holds a leading position in gaming, generates billions of dollars of free cash flow, has $23 billion of cash and its debt will likely be trading at lower yields than Treasury’s very soon.

But the best part, there is nothing positive priced into this stock, which trades at about 10 times free cash flow. It is incredibly cheap. Buying it now is like a talent agent signing Susan Boyle as a client the day before she went on stage. P.S. Though I’ve written this article last week, before Susan Boyle lost on Britain’s Got Talent, her loss did not make the point of the article any less valid. In fact, I spent several hours this week watching Britain’s Got Talent on YouTube with my wife and kids. What an incredible show. Susan Boyle did not win, but did not lose either, she’ll will likely become a big star –- she has a wonderful voice. I’d buy her CD and go to her concert in a heartbeat.





Speak your mind

4 Comments so far

  1. Bill Lambert on June 2, 2009 5:44 am

    What a wonderful advertisement for Microsoft. I wonder which parts have been overlooked by the plethora of money managers out there. Or perhaps it is just that US stocks are considered toast at this time. Surely the 'Omaha Sensation' is aware of these facts; one would think he would plunge into the value offered here. Bill L

  2. Roadrunner on June 2, 2009 9:23 am

    I have owned MSFT for many years. and with the exception when they paid out the one time extraordinary dividend I have been very disappointed. The stock goes nowhere. Which leads me to think that there are great companies and great stocks and this is not both. Management runs a business which by many accounts is a great cash machine but is not the type of stock that one is going to get rich holding. It also reminds me of the IBM of years past which sat around for years and did nothing until a new executive came in with a fresh and bold esprit de corp. Perhaps this is what the company needs is fresh leadership at the top. I do not know. Or then again one might look to other stocks that portend greater rewards and look to paths of lesser resistence.. I have noticed in my holdings that chinese stocks such as chl and russian such as VIP have been on fire. I have a ways to go to get even but the signs are encouraging.

  3. Dan Costin on June 2, 2009 10:19 am

    It’s entirely possible that Windows 7, the heir apparent, will be voted down in favor of Linux farms with cheap front ends. I’d call that combination Diversity. Even if that front end is Windows, in an economic downturn I wouldn’t be surprised to see many corporations insist on a cheap stripped-down version that won’t make too much money for Microsoft.

    As far as Office, Excel 2003 is fine, certainly don’t need a new Word, most people don’t use much more than what’s available in Notepad. Look at the Mac to see how really simple text processing software can be powerful when mated to HTML and RTF.

    While IT departments are happy to order Microsoft products (job security, what with all the registry entries they can set and unset), companies’ finance departments hate writing those checks, and the users generally blame it for all their problems. Peter Lynch used to say you should invest in companies whose products you like. Microsoft fails that test for many people.

    Microsoft needs a new product, not a new version. Maybe it’s Bing, maybe it’s the Zune, or maybe the lack of a vibrant high-standards R&D group has locked it into a generational mediocrity trap.

  4. Steve Leslie on June 2, 2009 7:50 pm

    I fail to see the comparison of Susan Boyle to MSFT. She was a virtual unknown who looked quite homely and wore a basic housedress to her audition for Simon Cowell's show. Visually she is unappealing. Once she began to vocalize, her significant talent emerged and people were captivated. Then they began to investigate what this unknown's story is. And then the background emerged about her never been on a date or kissing a man etc. MSFT is hardly an unknown. At this juncture of its life, It is in all likelihood one of the most analyzed companies in the world. And has been a public company for over a quarter of a century. I am sure many textbooks and academicians have written on this company. MSFT stock has gone nowhere since the market collapse of 2000 to 2003. It did make it up to 34 during the peak of the 2007 time frame but has essentially been a flatliner. Let's say the market decides to take off here from 8600 and go up 1000 points. I don't know how many analysts there are who follow the company but I think there are enough and it is unlikely that enough of them will be blindsided with earnings surprises to to the upside. Furthermore, lets say that the new operating system takes off and upgrades break all records. How significant must the breakout be to have a significant impact on the EPS encourage investors to begin investing in MSFT. I would think a fresher idea in this area would be GOOG. Or even AAPl or RIMM. If one were looking for an "ugly duckling" perhaps an idea here would be the banking industry. Not necessarily a C or Wells but rather a more relatively clean company like Sun trust. A deep value company may be in the gaming industry. One might like to consider LVS here provided the debt they have is manageable. In listening to Mr. Yardeni on Kudlow he made what I considered to be a very valid observation. that the overseas markets will respond to an economic upsurge far faster than the US market. If one buys into this argument, I would think Chinese stocks a natural and Russian stocks. Perhaps Indian and Israeli. I own MSFT and a few Chinese and Russian companies.


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