They referenced Adobe Systems Incorporated (NASDAQ:ADBE), whom they also invested in under similar circumstances; their stock had stagnated for years, and was seen by investors as nothing more than one to be traded in and out of around product cycles. ValueAct saw the potential for far more, for Adobe to take advantage of real and growing innovation with bold tweaks to their subscription methods, which they made, resulting in completely altered perceptions. Adobe is up nearly 200% since the start of 2013 as a result, after flatlining for seven years. ValueAct recently sold some of their position to enjoy the windfall of that investment. They believed the same could be true of Microsoft.
We believe that Microsoft suffers a similar perception problem to the one that existed when we initially invested in Adobe. The company has long been regarded as a Windows / PC-cycle stock. In fact, just last week, dire predictions about near term PC deliveries spurred another round of terrible Microsoft headlines. Sell-side analysts focus on Microsoft’s efforts to drive Windows client success in a changing computing world and have become increasingly bearish after the lukewarm launch of Windows-8, which many hoped would revive PCs.
As they said, this was the common perception of Microsoft Corporation (NASDAQ:MSFT), and yet a very narrow one of the company’s true potential and worth.
Instead of looking at Microsoft through the usual PC lens, we look at it through our “plumbing” lens and we like what we see. Nearly 70% of Microsoft’s earnings come from the enterprise-centric business divisions of Server & Tools and Microsoft Business Division (e.g. Office). These businesses derive 60% of revenue from multi-year annuity agreements and have grown EBIT nearly 10% per year over the past five years.