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Can Microsoft Corporation (MSFT) Break Out?

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Microsoft Corporation (NASDAQ:MSFT) appears to be providing investors with quite the investment opportunity. This comes after having traded in a tight range between $23 and $33 over the last three years; it is currently trading in the mid-range at $27. We believe that Microsoft is finally ready to break out given its diverse product portfolio and growth opportunities.

Microsoft has a stronghold on the operating system market with its Windows platform, which continues to generate solid revenues and cash flows for the company. A key driver of its Windows operating system is the demand for PCs. Although the PC market remains weak it is gaining strength. Gartner estimates that PC shipments will grow 4.4% in 2012, an improvement over 1.9% growth in 2011. IDC has similar expectations with 2012 expected growth of 5%, following a 1.8% increase in 2011.

Warren Buffett

Given the growing importance of mobile platforms, Microsoft has been taking steps to build a position in the mobile computing segment. Its partnership with Nokia, which is currently the third largest player in the smartphone segment after Samsung and Apple, is the tech company’s main avenue for offering investors its Windows mobile OS. IDC expects the Windows Phone OS to be the second largest OS with a 19% global share of the smartphone market by 2016. Microsoft’s server business is also seeing solid growth from cloud computing – its server segment has posted double-digit revenue growth for 2010-2012. The other major segment for Microsoft is its gaming division, which makes it one of the three largest game providers.

The tech giant has a solid market positioning in the search engine sector. Microsoft has been taking market share from Yahoo specifically, and currently owns around 15% of the U.S. search market. We expect Microsoft’s search market infringement to continue with various initiatives, such as an agreement with HP to place Bing as the default search engine on most of its PCs. Microsoft is also continuing to seek growth via mergers and acquisitions. The tech giant made nine acquisitions in 2009 and added two more in fiscal year 2010. We see Microsoft as a solid value play; over the past five years, Microsoft shares have traded in the range of 8.6x to 19.5x earnings, but its forward P/E is as low at 8.5x.

Some of Microsoft’s biggest competitors include International Business Machines Corp. (NYSE:IBM), Oracle Corporation (NASDAQ:ORCL), Hewlett-Packard Company (NYSE:HPQ) and Google Inc (NASDAQ:GOOG). IBM pays a dividend yield that is low – 1.7% – but solid at only a 22% payout. The chipmaker trades somewhat in line Microsoft at 14x earnings and the diversified tech company has managed to gain 20% year to date on relatively solid earnings performance. Billionaire Warren Buffett is one of IBM’s biggest investors, having over 18% of his 13F portfolio invested in the tech company (check out Warren Buffett’s top picks).

Continue reading to see why Microsoft will outperform its competitors…

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