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.

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