Microsoft: Growth or Value?

06/16/2006 12:00 am EST


John Dessauer

President, John Dessauer Investments, Inc.

"I’ve been telling investors to buy blue chip ‘dogs’ and I’m adding a tech giant to my buy list," says John Dessauer . "Analysts have been cutting estimates for large-cap tech, while I see business spending picking up." Here’s his outlook on Microsoft.

"Is Microsoft (MSFT NASDAQ) a growth stock or a value stock these days? That seems to be the big question among mutual fund managers. Microsoft is sitting on $40 billion in cash. When they announced a major capital spending increase, the stock plunged. Value fund managers thought they had been betrayed, while growth fund managers stayed on the sidelines, not sure if Microsoft can grow again.

"This debate presents us with an excellent entry price. Microsoft has traded in a fairly narrow range since 2000, while earnings have grown from $0.85 a share in 2000 to $1.16 last year. Estimates for this year are $1.31. Granted, the earnings growth rate from 2000 to 2005 is pedestrian, but this year’s projected 13% growth is impressive, and I see major new opportunities opening up as Microsoft regains its historic competitive edge.

"Over-reliance on marketing weakened Microsoft. Instead of competing head on by producing better products at a better price, Microsoft stayed on a fix-it, patch-it course with Windows and bundled products. It is tough for big companies to adapt and change. But I believe Microsoft has changed and will launch a new wave of growth. Microsoft faces a number of challenges—including internal management changes, a pressing need to turn Windows into a first rate system, legal pressures and (most significant) competitive pressures in every aspect of Microsoft’s business.

"In short, Microsoft has been forced to change or else be marginalized. Microsoft is already battling Sony in the gaming market and Yahoo and Google in search engines. But did you know that Microsoft is also competing with Adobe? During a recent course on Adobe Photoshop Elements 4.0, my instructor pointed out that Microsoft’s digital imaging software is as good as Adobe’s and is easier to use. In gaming, Sony has delayed the launch of Play Station 3 until November. This gives Microsoft’s Xbox 360 a chance of grabbing more market share.

"At the core of the new Microsoft is a feature-rich operating system called Vista. In November, we will see the first launch of the Vista products. Microsoft has no debt and $40 billion ($3.25 per share) in cash. There is no danger of Microsoft being the next Enron. On the contrary, Microsoft has the financial strength and cash flow to keep buying back stock and raising the dividend. My 12-month target is $30. Microsoft is a Buy."

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