Can Microsoft Corporation (MSFT) Turn Into a Growth Stock?

Microsoft Corporation (MSFT)“The lost decade,” I’ve heard this phrase repeated about Microsoft Corporation (NASDAQ:MSFT) more than any other. Multiple articles have been devoted to the company’s mistakes and challenges over the last ten years. For a while, I thought of Microsoft as an out of touch technology company that would fade with the PC industry. However, the company is changing right before investors eyes, and there is a real chance that it could become a beloved growth company again.

I Know The Argument, I’ve Made It Myself
There is no doubt that Microsoft Corporation (NASDAQ:MSFT) faces significant competition from the likes of Google Inc (NASDAQ:GOOG) in search, advertising, and smartphones. The company also has to deal with its old nemesis Apple Inc. (NASDAQ:AAPL), and the company’s huge sales of iDevices that threaten the PC, tablet, and smartphone industry. Even Research In Motion Ltd (NASDAQ:BBRY), which seemed lost until recently, won’t go down without a fight.

What makes Microsoft Corporation (NASDAQ:MSFT) different from its competition? One thing is, the market doesn’t expect much from the company. These same shares that used to fetch 50 times earnings, today trade for less than 12 times projections. Second, there is a prevailing assumption that their competition, specifically Google Inc (NASDAQ:GOOG) and Apple Inc. (NASDAQ:AAPL), are so unassailable that Microsoft can’t win business. Third, investors have been told so many times about Microsoft’s “lost decade” that it has almost become a mantra for avoiding the shares.

The Entertainment And Devices Challenge
IDC research suggests that over 900 million smartphones will be sold in 2013. Google Inc (NASDAQ:GOOG)’s Android system commands 75% of the global market, Apple maintains about 15%, and Research In Motion Ltd (NASDAQ:BBRY) is still holding just over 4% market share. While Microsoft isn’t in the top three yet, the company’s worldwide market share increased last year from 1.2% to 2%.

2% doesn’t sound like a lot, until you consider that 2% of 900 million is 18 million devices. The company’s market share nearly doubled last year, without impressive devices like the Nokia 920 smartphone. I wouldn’t be surprised to see Microsoft gain market share again in 2013.

Keeping within the company’s Entertainment and Devices division, the fact that Microsoft Corporation (NASDAQ:MSFT) is about to take the wraps off the next generation of Xbox console is good news as well. The Xbox’s capabilities are becoming more central to customers entertainment. This argues that the next console could allow Microsoft to have more to say about entertainment spending in the future.

The New Leaders
What if I told you that Windows isn’t that important to Microsoft Corporation (NASDAQ:MSFT)? You might think I’m crazy, but believe it or not, the company’s Business division (aka. Microsoft Office) actually generated $6.32 billion in revenue compared to $5.7 billion from the Windows division. In addition, the company’s Server & Tools business is close to becoming the second biggest division with $5.04 billion in revenue in the last three months.

The Business division grew revenue by 5%, and Server & Tools grew by 11%, while Windows revenues were flat. If this trend continues, these two divisions could soon be number one and two in importance to the company. The fact that COO Kevin Turner said, “we continue to take share from our competition in key areas including hybrid cloud, data platform, and virtualization,” speaks to the strength of the company’s competitive position.

Cash Flow? More Like Cash Downpour!
Everyone pretty much knows about Microsoft’s huge cash pile, but do you realize how fast the company is growing their cash flow? When looking at the cash flow statement, I use a metric called core operating cash flow. This measure eliminates a lot of the non-cash adjustments on the cash flow statement, and just looks at net income plus depreciation.

I bet most people won’t believe it, but Microsoft Corporation (NASDAQ:MSFT) grew faster than Google when it comes to core operating cash flow. In the last year, Google’s core operating cash flow grew by 20.26% and Microsoft grew by 21.01%. By comparison, Apple actually saw their core operating cash flow decline by 0.93% and BlackBerry reported a decline of 52.66%.

A Claim You Couldn’t Make Ten Years Ago
When you look at stock valuations, Microsoft offers one of the most compelling values of the bunch. This was certainly something the company couldn’t claim ten years ago. Apple’s value still leads the way with a newly minted 2.8% yield combined with an expected growth rate north of 20%. With shares trading for nearly the same P/E as Microsoft, Apple Inc. (NASDAQ:AAPL) will have to miss earnings by a large amount to be a poor deal for investors.

Ironically, Google and Research In Motion Ltd (NASDAQ:BBRY) offer similar values, though in different ways. Google Inc (NASDAQ:GOOG) sells for over 17.7 times projected earnings, and is expected to grow earnings by about 15%. BlackBerry is generally expected to report small profits the next few years, but 40% of the company’s market cap. is the cash and investments on the balance sheet, and the company is free cash flow positive.

Microsoft Corporation (NASDAQ:MSFT) offers a class leading yield of about 2.9%, and a respectable growth rate of about 8.5%. With a relatively low P/E ratio, the stock looks like a good value. If the company can continue to grow its Business Division as well as Server & Tools business, Windows will actually be the company’s third largest division. With a new Xbox, new Windows 8 smartphones, and 20% cash flow growth, the stock looks like a real growth story once again…can you believe it?

The article Can This Company Become A Growth Stock Again? originally appeared on Fool.com and is written by Chad Henage.

Copyright © 1995 – 2013 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.

blog comments powered by Disqus
Insider Monkey Headlines
Insider Monkey Small Cap Strategy
Insider Monkey Small Cap Strategy

Insider Monkey beat the market by 52 percentage points in 24 months. Our beta is only 1.2 (don't click this link if beating the market isn't important to you).

Lists

On the Move: The 10 Fastest Growing Businesses in 2015

Fast Money: The 10 Highest Paying Fast Food Restaurants

Mixing It Up: The 14 Best Music Mashups of 2014

Rito Pls Buff: The 10 Least Played Champions in LoL Season 4

10 Covers of Popular Songs that are Better than the Originals

Must See TV: The 9 Most Anticipated Shows of 2015

The 15 Biggest Box Office Bombs of All Time

10 Things The World Can’t Stand About Americans

Picture Perfect: The 6 Smartphones with the Best Cameras

The 10 Best Countries To Work In the World

A Profitable Day At The Track: 5 Tips For Betting On Horses

Tearing You Apart: 6 Bad Habits That Ruin Relationships

Learning on the Job: The 6 Biggest Mistakes Parents Make

Shopaholics Rejoice: The 12 Biggest Malls in the World

Fright Night: 10 Horror Movies Based on True Stories

Mach Mania: The 10 Fastest Jets in the World

Military Heavyweights: The 10 Countries with the Most Tanks

All In: The 7 Richest Poker Players in the World

Abracadabra: The 10 Best Magicians in the World

The 10 Richest Asian Countries in the World in 2014

Eyes in the Sky: 10 Things You Need to Know About Drones

Rising Stars: The 6 Best Silicon Valley Startups

Military Muscle: The 5 Most Advanced Armies in South America

All that Glitters: The 7 Most Luxurious Jewelry Brands in the World

5 Things You Didn’t Know About ISIS but Should

Empowering Your Money: The 5 Best Energy Stocks to Invest In

The 11 Best Android Apps You Can’t Get on iOS

The 10 Most Important International Conflicts in 2014

Mood Enhancers: The 20 Most Uplifting Songs of all Time

Lover Beware: The 8 Countries that Cheat the Most

Breath of Fresh Air: The 25 Countries with the Best Air Quality on the Planet

Singles Beware: The 8 Worst Mistakes Made on First Dates

Healthy and Happy: The 10 Countries with Lowest Healthcare Costs

The 6 Best Company Team Building Activities to Build Workplace Camaraderie

Ships Ahoy: The 10 Busiest Shipping Ports in the World

10 Productivity Tips to Save You Time and Help You Do More With Less

Grab a Bite: The Most Popular Fast Food Restaurants in America

Friday Night Thirst: The 10 Most Popular Cocktails in the World

The 6 Greatest Unsolved Mysteries We May Never Figure Out

7 Useless Products You Never Should’ve Bought

The 5 Reasons Why You’re Single and Miserable

The 7 Most Addictive Foods in the World We Can’t Stop Eating (Even Though We Should)

5 Amazing Places You Can Swim with Dolphins

The Top 7 Most Livable Countries In The World

The 10 Most Expensive Baseball Cards Ever Pulled From A Pack

The 5 Easiest Second Languages to Learn for English Speakers

Silver Spoon: The 6 Richest Families in the World

The 20 Countries with the Largest Prison Populations in the World

The Top 10 Richest Actors in the World

The 10 Best Airline Stocks to Invest In Before They Fly Too High

Subscribe

Enter your email:

Delivered by FeedBurner

X

Thanks! An email with instructions is sent to !

Your email already exists in our database. Click here to go to your subscriptions

Insider Monkey returned 47.6% in its first year! Wondering How?

Download a complete edition of our newsletter for free!