Whitney Tilson Says Microsoft Is A Better Investment Than Apple

Whitney Tilson was extremely bullish about Microsoft in his 2010 yearend letter to investors. He expected Microsoft to reach $35. Here is what he said about Microsoft back then:

T2 PARTNERS

Microsoft reported spectacular earnings in late October, handily beating analysts’ estimates, yet the stock has barely moved so we’d added to our position.

Adjusting for the deferral of Windows 7 revenues last year, Microsoft reported revenue, EPS, bookings, and operating cash flow growth of 13%, 19%, 24%, and 34%, respectively. The company’s results were strong across the board, riding a wave driven by its three main profit drivers, Windows, Office, and Server & Tools.

Capital allocation was excellent, as Microsoft has (so far anyway) avoided doing what so many other large, cash-rich companies are doing, making a big, overpriced acquisition, and has instead wisely ramped up returning cash to shareholders: $5.5 billion last quarter via $1.1 billion of dividends (the stock currently yields 2.3%) plus $4.4 billion of share repurchases (up 3x year-over-year, leading to the diluted share count falling 3.2%). At this rate, the company will retire nearly 8% of its outstanding shares in the next year.

The stock closed the year at $27.91 and the company has $3.85 of net cash ($4.91 if one includes “Equity and other investments”), so the stock, net of cash, is at $24.06. Trailing earnings are $2.32/share, so that’s a P/E multiple of 10.4x. That’s insanely low for a company with Microsoft’s characteristics: dominant and stable market shares across various products, 81% gross margins, 33% net margins, an infinite return on capital, prodigious cash flows, and one of the strongest balance sheets in the world.

The consensus view is that Microsoft is an incompetent, lumbering dinosaur, declining rapidly toward the dustbin of history. Newspapers, check printers and paging companies, look out! The problem with this view is that there is no evidence for it. Despite endless predictions over the past decade of how Apple or Linux or Google Apps are going to erode Microsoft’s dominance in its key product categories, the company’s market shares are stable or rising. Revenues and profits, rather than falling, are rising sharply.

Yet analysts persist in ignoring the overwhelming evidence of Microsoft’s powerful new product cycle and are projecting flat revenues and EPS down 8.1% for the current quarter (ending December 2010), and flat earnings for the remaining three quarters of the 2011 fiscal year. In light of such low expectations, we believe Microsoft will continue to handily beat estimates over the next year, with earnings growth in the mid-teens. This, combined with likely multiple expansion, should result in the stock appreciating to at least the mid-$30s range with a year.

Microsoft lost 8.4% in 2010. It lost another 8% so far in 2011. It seems like Tilson is still extremely bullish about Microsoft. Recently Tilson recommended “big-cap blue chip companies that are trading at moderate prices”. “(Apple is) a fabulous business, but I’m simply pointing out that you can own a better business, albeit one that is not growing as quickly — but still growing nicely — for half the price in terms of price-to-earnings multiple,” Tilson said to Reuters.

Tilson’s strategy hasn’t helped his returns much this year. He is trailing the S&P 500 index by 9 percentage points this year. T2 Partners lost 3.1% during the first quarter, vs. up 5.9% for the S&P 500.

Biotech Insider Alert - $6 Stock To Hit $40

$200 Million Dollar Healthcare Hedge Fund's #1 Best Idea Right Now

The best healthcare hedge fund out there right now is one of the largest shareholders in this biotech stock. The fund returned more than 20% in each of the last 2 years with a virtually fully hedged portfolio, and it's sending out a BUY signal on this biotech stock. Get your FREE REPORT today (retail value of $300)

This is a FREE report from Insider Monkey. Credit Card is NOT required.
Comments
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

The Oldest Money Managers

The Greatest Directors in the World

Largest Animals in the World

World’s Most Expensive Desserts

Best Selling Comic Books of All Time

A-list Actors who Sabotaged Their Career

Rappers With a College Degree

The Best Jazz Albums of all Time

The Most Influential Jazz Musicians

The World’s Most Famous Photographers

The Best Oscar-Winning Songs

Most Influential Choreographers Ever

Most Expensive Department Stores in the World

The Most Expensive Stolen Paintings in the World

The World’s Most Expensive Teas

Top Oscar Record Holders

The Most Expensive Flowers in the World

Countries With a Booming Film Industry

Most Expensive Cupcakes in the World

Uncommon European Escapes

The Most Stolen Artists in History

Best Travel Destinations in Australia

World’s Most Expensive Musical Instruments

World’s Most Famous Animals

Most Expensive Cakes in the World

Most Expensive Kosher Champagne in the World

Most Expensive Kosher Wine in the World

The Most Surprisingly Dark Fairy Tales

Most Popular Travel Destinations in Asia

The 10 Most Expensive Dresses Ever Worn to the Oscars

World’s Most Visited Art Museums

Best Countries for Photographers to Work in

Best Paid Jobs in the Film Industry

The Most Renowned Recovered Paintings Ever

Child Stars That Turned out Just Fine

Books That Were Banned in the Past Century

World’s Richest Dancers

Best Remedies against Bad Breath

Foods That Improve Your Skin Texture

Best-Selling Children’s Books of all Time

Foods That Boost Your Libido

Best-Selling Books of all Time

The Most Expensive Academy Awards Jewelry in History

Most Expensive Japanese Restaurant In New York City

The Best B-Boy Movies

Most Awesome Hip Hop Documentaries

Foods That Stain Your Teeth

Richest Doctors in the World

The Best Movie Sountracks Ever

The Highest Grossing Musicals on Broadway

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 129% in 2.5 years!! Wondering How?

Download a complete edition of our newsletter for free!