A look back at Microsoft
Has this Tech giant matched expectations?
About a year ago I has a first look at Microsoft, an American Tech company known for its operating system and office line of products.
At the time, I did some valuations, and although the numbers looked very nice, and the company was clearly a high quality company with a history of growth, I declined to purchase more out of a concern that the business was trading at a multiple that was unconfortably high.
It’s now been a year, and it’s time for me to look back at the business, see if anything meaningful has changed with it, and if it’s at a more attractive price now.
The Thesis
Let’s take a look back at what I wrote a year ago to see what I thought about the company, and what the thesis for it would be:
This is a quality company with high margins and growth
The management team is fantastic
The company is diversifying by growing previously secondary sectors
The company is increasingly returning capital to shareholders
The company is valued too highly to be comfortable
How has this held up?
Let’s take it point by point:
This is a quality company with high margins and growth
Well, this is absolutely right and it hasn’t really changed in the past year.
Indeed, if we have a look at the companies latest 10-K released last month, we can see that the companies profit margins have remained steady at an amazing 36%, and that both revenue and earnings have grown substantially.
Given the enormous numbers we’re discussing, these profit margins and earnings and revenue growth are truly impressive.
The management team is fantastic
Nothing really has changed here.
Satya Nadella is still CEO and chairman of the board, and has continued to do what looks to be a perfectly good job.
Overall I continue to have no objections to the management team.
The company is diversifying by growing previously secondary sectors
On this front the company has carried on its mission, with the most high profile example of this being the upcoming Activision Blizzard acquisition.
This is an acquisition I went into greater detail in my report on ATVI 0.00%↑ that you can read here.
Overall i’m satisfied with this progress.
The company is increasingly returning capital to shareholders
Shortly after my release of the Microsoft report, the company has raised their dividend.
And indeed if we have a look at their statement of cashflows we can see that over the past year, the business has increased the amount of cash that they’ve returned to shareholders!
That’s almost $49 Billion returned to shareholders over the past year, compared to $42 Billion the year before.
This is an enormous amount of cash that shareholders are receiving!
The company is valued too highly to be comfortable
Well the market seemed to disagree with me initially, raising the companies price up to almost $350 per share, but they have since come around, and the company is now trading at around the same share price as it was a year ago when i first made my decision.
Overall, my opinion that it is overvalued still remains, while it’s true that the companies earnings and revenues have increase tremendously, I’m still hesitant to purchase at such high multiples given the enourmous increases that it would require to make such an investment worthwhile.
The future
Overall my thesis remains the same, and company continues to be a high quality company with a bright future.
The core value proposition is:
The company is reliably profitable
Those profits will continue to grow
The amount of capital returned to shareholders will continue to grow
The business is trading at too high of a multiple to invest in
None of these issues have changed, and so my position has also remained the same.
My Stance: HOLD
