Microsoft Has the Wind in Its Sails
05/04/2010 1:00 pm EST
Jack Adamo, editor of Jack Adamo’s Insiders Plus, says the software giant has a great new product cycle that should power revenues, earnings, and cash flow.
Microsoft (Nasdaq: MSFT) delivered another solid quarter and received another yawn from the market.
Revenues were up 6%, operating income grew 17%, and diluted earnings per share rose 17%. Here’s another stock with a PEG (price-to-earnings/earnings growth) ratio of one. What can I say? I guess I just like boring companies that are cheap and throw off tons of cash.
Windows 7 has already achieved a market penetration of 10% worldwide, making it the fastest selling operating system in the company’s history, while leaving plenty of room to grow.
The new versions of Microsoft Office, Exchange, and SharePoint are all on their way into the pipeline and should start showing some impact on revenues this quarter. Exchange and SharePoint are products corporations use to manage communications and tasking among its employees.
I [wrote] about cloud computing, whereby companies outsource most of their computing and software needs to central servers in an effort to save money. Personally, I think it’s an insane practice that leaves a company’s data at risk of being compromised.
However, I don’t run corporate America, and cloud computing is the big fad now. Practically every [chief executive officer] will eventually go that route to show he’s up on the latest tech innovations. That will probably continue until there are a few major security problems, then the trend will reverse.
Anyway, Microsoft has gotten out of the gate quickly on cloud computing. It already has signed up major customers such as Starbucks (Nasdaq: SBUX), McDonald’s (NYSE: MCD), GlaxoSmithKline (NYSE: GSK), Coca-Cola (NYSE: KO), and Aviva (NYSE: AV). Mr. Softie looks well-positioned to benefit from this fad. I predict it will be followed up by a resurgence of the hula-hoop.
I looked at some analysts’ reports on the stock after [the recent] earnings call. Most had price targets between $35 and $40 with one outlier at $32. The outlier was from Morningstar—probably the only firm that wasn’t seeking underwriting business with Microsoft or making a market in its shares. The others may have added a little optimism to butter up Microsoft execs.
Still, when it comes to technology stocks, I still have to defer to Fred Hickey (author of the High Tech Strategist newsletter—Editor). Fred thinks the stock is worth closer to $45. We’ll see. I think it has good upside potential with minimum downside risk. Microsoft is a buy up to $33. (It closed just below $31 Monday—Editor.)