Microsoft’s Future

Barron’s writes that “[Microsoft’s] shares have rarely been cheaper or its outlook more promising” and discusses “why the titan of Techdom is primed to grow, and grow, and grow.”

Investors are missing the big picture. The stock, which dipped slightly Friday following a fourth-quarter earnings report that came up a penny shy of expectations, is trading at a near-historic low valuation. Investors are interpreting the software giant’s new plan to pay out a mountain of cash to shareholders as a signal that its days as a growth stock are over. But the opposite is true: Microsoft is gearing up for further revenue gains and accelerating profits. The company has never been better positioned, and the stock has rarely been more attractive.

The real story on margins in recent years has been the company’s strategic decision to spend heavily on new businesses, losing billions of dollars in the process. When you look at the numbers, however, and you find Microsoft is making fundamental progress in all of its new lines.

Thanks to the surge in Internet advertising, for instance, the ‘Net service MSN is now in the black, having just completed its first profitable year; it generated $121 million in operating income on $2.2 billion in revenues. Meanwhile, profits are surging at the company’s fast-growing server software unit, the third biggest slice of the company after the divisions that include Windows operating systems and Office business software. In fiscal 2004, the server business grew 19%, to $8.5 billion.

The back-office, enterprise-applications business, created essentially from nothing from the acquisitions of Navision and Great Plains software, has struggled, but it has pared losses and continues to generate strong revenue growth — 18% in fiscal 2004. While Microsoft continues to suffer losses on the Xbox game console — $1.2 billion in fiscal ’04 — a recent price cut sent unit volume soaring 27% in the fourth quarter, and the company is hard at work on a second-generation console, expected in 2005.

And while all this has been going on, the company has been cranking out the usual solid numbers from its core Windows and Office businesses. In fiscal 2004, both segments got a push from strong personal-computer sales. The company’s information-worker segment, which includes Office, increased revenues 17% last year, including 23% in the June quarter. And revenues for the operating-system business grew 11% for the year and 9% for the quarter.

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Rajesh Jain

An Entrepreneur based in Mumbai, India.