Microsoft Corporation (MSFT): Is The Surface Tablet a Dud?

Sometime in 2013, the rumor foresees three new Surface coming from Microsoft, with the first being an 8.6-inch standard Surface (which is two inches smaller than the current model), the second being a Windows 8 Pro-equipped Surface with an 11.6-inch screen, and the third being a 14.6-inch device called the Surface Book. If these rumors are true — and there’s a possibility that they’ll end up being off the mark — then it appears that Microsoft is positioning itself to compete with the iPad Mini and the iPad by way of separate devices, while offering something in the form of a hybrid laptop-tablet with the 14.6-inch model.

If investors are looking to get into Microsoft based on its potential in the tablet arena regardless of this rumor, the stock’s valuation indicates that now may not be a bad time to do so. At it’s current market price in the $26 range, shares of MSFT trade at a mere 8.1 times forward earnings, which sell-side analysts expect to average EPS growth of 9-10% a year over the next half-decade. In comparison, Apple (9.9X), Google (14.9X), Oracle Corporation (NASDAQ:ORCL) at 11.1X, and International Business Machines Corp. (NYSE:IBM) at 11.4X, are all more expensive.

But that’s not all. Microsoft sits on a mountain of operating and free cash flow nearly $60 billion high, yet trades at a paltry 7.1 times the value of this cash, which is below both the industry average (9.1X) and the company’s own five-year historical average (10.1X). As you can probably expect, Microsoft’s cash valuation is also cheaper than Apple (10.7X), Google (14.3X), Oracle (11.7X), and IBM (10.9X) by a modest margin. For income investors who are a bit hesitant on a pure value play approach, Microsoft also offers a superior dividend in comparison to most of the other players in the mega-cap tech arena, paying a yield of close to 3.5%.

To recap: while it’s impossible to know for certain how Microsoft will handle the Surface in the future, bears should be careful to write off the company’s tablet just yet, as it may still have some surprises up its sleeve, so to speak. From an investing standpoint, shares of MSFT look attractive nearly every way you slice it, and it’s possible that we’ll see solid value — and income — based appreciation going forward. For a longer look at Microsoft, check out its profile page on Insider Monkey.