Moreover, Microsoft is investing a lot of money in cloud computing in order to make its ecosystem more attractive to users from both the business and consumer sides. If successful, this should result in a lot of upside potential for the company.
Current valuation
Currently, Microsoft Corporation (NASDAQ:MSFT) enjoys a P/E ratio of 12. However, this number is expected to fall to 10 by 2015. In fact, excluding cash, Microsoft is looking at a future P/E ratio of 8, which means there is still a lot of room for this stock to go up. While waiting for the stock to go up, investors are being paid dividends, which is good for patient investors with long-term horizons. Speaking of dividends, in the last ten years, Microsoft grew its dividends from $0.08 per share to $0.86 per share. Again, in the last ten years, there was never a year when Microsoft didn’t increase its dividend rate compared to the previous year. Given the low payout ratio, Microsoft could easily double its dividends at the current cash flow rates.
Microsoft’s price to book value of 3.7 is in line with the industry average, while the company’s price to sales ratio of 3.8 is slightly below the industry average of 3.9. Furthermore, the company’s price to cash flow ratio of 9.5 is below the industry average of 10.6. At this point, Microsoft’s valuation is at pretty healthy levels. Because Microsoft mainly deals with software and services, it has pretty high margins. Microsoft’s gross margin is 75.4% in the trailing twelve months, and the company’s operating margin is 27.5% in the same period. Even though this number is slightly below historical figures, it is still impressive.
Conclusion
I own shares of Microsoft Corporation (NASDAQ:MSFT) and I don’t plan on selling any time soon. The company will continue to reward patient investors for years to come. In 2000, Microsoft was a bad investment due to high valuation compared to the company’s earnings. However, in the last ten years the company became a very attractive investment, as its valuation was pulled to more reasonable levels. The next ten years of Microsoft should be brighter than the last ten years of the company.
The article Microsoft Is Still A Good Investment originally appeared on Fool.com and is written by Jacob Steinberg.
Jacob Steinberg owns shares of Microsoft, Nokia and Hewlett-Packard Company. The Motley Fool owns shares of Microsoft. Jacob is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.
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