Erik’s Blog: Board Shorts and Business Suits

For the last 5 years I have bee following Microsoft stock (MSFT). I bought 2 shares for $100 back in the summer of 2002 just before it split using my ShareBuilder account. My thought was that I would use the cheap fees of ShareBuilder to build up shares in MSFT. Being that Microsoft was and is the software giant of the world I though this would be a sound investment. Since then the stock has split and I was up to four shares, I was a poor college student who didn’t invest for about 2 years and now have increased my holdings to 42.65 shares (Sharebuilder allows you to buy by the dollar amount and not the shares).

MSFT is still at $27 a share and continues to fester at the this price. I have been able to wait out the ups and downs and buy in the downs where it is at $25 and then wait it out for the next cycle. If I had enough money (common catch phrase) I would buy 500 shares every time this stock nears $25. As you can see in the graph provided by yahoo MSFT has consistently moved within this window over the last 3 years. I suspect a lot of people have done this that have the money.

One good thing about holding onto Microsoft stock is their good dividend payment. Currently the yearly payout is $0.32 per share. Last December they gave out more than $30 billion in a year end $3 per share payout; some people I imagine made a pretty penny here. I however only had my 4 shares and made a measly $12.

So what do I think about Microsoft as a stock…

Strong Buy

Disclaimer:
Let me begin by restating that I only own 42 shares of MSFT. I don’t think I have anything to gain by giving you my opinion on why I think Microsoft will be a good stock to own for the upcoming year. Another reason is that these are just insights into why I see MSFT as a strong buy, I am an engineer not a Stock Adviser. But then again, who really are stock advisers?

On to the reasons why MSFT should be in your portfolio.

1. Xbox 360

If you haven’t noticed every single Xbox 360 that was shipped for opening weekend has been sold. Current price on eBay for an Xbox 360 is right around $1000.00. That’s $700 more than

MSRP. Now I have heard that Microsoft actually looses money by selling you an Xbox so why would they want to keep supply up? Probably because they sell games for $60 a piece, and last time I checked a DVD and a burner don’t total that much. There is time spent programming but think of all the license fees that MSFT sells off, the advertising in games, and the peripherals.

The closest competition Sony isn’t slated to come out with their competing PlayStation 3 system until mid 2006. That leaves a lot of time for Microsoft to make some pretty decent profits. And think of all those kids that have Xbox 360 on their Christmas list, when parents are unable to provide the system, they’ll get the games. With all those games already sold, Microsoft will just make a few more systems and repeat.

2. Windows Vista (aka Longhorn)

New Windows Operating System, enough said. Coming late next year, 2006.

3. Online Software and Marketing

We all knew it was coming, Microsoft vs. Google. The fight is on. With MSFT’s www.live.com they have officially entered the online realm. Very similar to Google’s search portal, live.com integrates nicely with internet explorer and opens itself up to programmers to design web add ins.

Beating Google to the punch Microsoft has unveiled a new step in Software development. Often talked about within the Google world is creating an operating system on the web. Having all documents be accessible everywhere using web-based software. Well sorry Google on the slate in the spring of ‘06 is Office Live. Initially Microsoft says Office Live will be geared towards small businesses who normally email large files in formats such as Word, Excel, and FrontPage back and forth. This new software allows companies with employees located in several geographical locations (not to mention those of us too lazy to wander down floor) share files easily and allow real-time simultaneous access to the same documents (or so they say).

Rumor has it that a free ad supported version will be available during beta test. Yes listen to those words, ad supported.

Also rumored to be coming is an AdSense-like product from Microsoft. Already beginning to post similar ads on their pages (read here) Microsoft is jumping into the billion dollar a quarter market that Google and Yahoo have cornered for the last few years.

If Microsoft can even take %10 of the huge market share that Google has that will be profits unseen currently by MSFT using little capital to begin with. This is a giant step for Microsoft but one that is needed if it wants to stay ahead in the new era of software.

4. Cash on Hand

$40.06 billion. That’s over $3 a share. That is quite a war chest to do whatever it wants, research, takeovers, payoffs etc. Now some financial analysts will say too much cash on hand represents a company that isn’t up for growth. Can we really say that about Microsoft? I foresee a lot of money spent in optimizing online software. Bill Gates is no dummy. He knows where the world is headed and more than likely intends to spend his companies money getting there.

With that much cash on hand it seems like another generous year end dividend could be around the corner. Microsoft knows it needs to show it isn’t a monopolizing tyrant. Paying people off is usually a good start. Get it in now and you could easily make a dollar or two a share.

5. Image Adjustment

Everyone knows Microsoft has a tendency to overpower the little guy (Netscape comes to mind). Lately however they have been settling disputes and trying to appeal to the little guy. Now I don’t expect to see Microsoft using open source coding but I do expect them to allow more people to join in the development of their online tools. Within days of live.com’s arrival to the web there were about 30 add ins, or Gadgets as they call them. Currently there are 87. These are add ons that can be added to customize your msn search homepage. They display things such as weather, news clippings, horoscope, games, quotes, etc.

While Microsoft tries to soften its image Google seems to be turning into a giant of its own. Stopping by a few forums lately I have noticed a few questions regarding Google’s takeover of companies such as Urchin (web stats), Picasa (pictures), and Keyhole (Google Earth). Although they have provided all of these programs for free choosing to make the bulk of their money via advertising revenue, one has to wonder how long it will take for the tides to start to turn against the company whose company motto is “Don’t be evil.”

Final Thought

Anyway you slice it Microsoft has to be a strong buy. Their direction is well planned. With the release of Xbox 360, the launch of live.com, the upcoming Office Live suite and the anticipated Windows Vista, Microsoft looks poised to make solid profits and growth over the next few years. My plan, if the finances allow is to buy on those inevitable dips below $26 and accumulate as many shares as I can. using my ShareBuilder account. If the stock rises above $28 and holds I won’t stop, just steadily build my position and wait out the next two years.

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