Novice Investing - Microsoft Micro Growth

Date: Monday 01st 2008f December 2008 03:59:29 PM

Microsoft Micro Growth - 11/22/2005

By: Novice Investing Staff

Microsoft Corp. (MSFT) is what every investors aspire to discover. Finding the next Microsoft has become a common phrase for investors who find small companies that will eventually grow to be as successful as Microsoft.

Well, those growth days are over. Microsoft stock price has been range bound in between $ 24 and $ 30 for almost three years now. What does the price of Microsoft stock imply about the growth in EPS in the coming year? Let's investigate.

Microsoft has $ 40 Billion in cash & cash equivalents while having $ 0 in long term debt. Therefore, positive net cash is $ 3.76 per share. Meanwhile, analysts are expecting the company to earn $ 1.32 for fiscal year 2006.

At a recent price of $ 28, the real price of Microsoft's business is ($ 28 - $ 3.76) = $ 24.24 per share. If Microsoft is fairly priced right now, then analysts expect the company to earn ( $ 24.24/ 13.4) = $ 1.81 within five years. Our assumption is that Microsoft will stop growing in year five and that the fair value for Microsoft stock is a P/E of 13.4 (7.46 % yield). Earning of $ 1.81 is the present value of Microsoft earning. Assuming a 4.5% discount rate, Microsoft earning would actually be $ 2.25 in year five.

The company is expected to earn $ 1.32 for this fiscal year. It it is expected to earn $ 2.25 in year five, this implies earning growth rate of 11.2 %. So, what do you think? Can Microsoft grow its earning at a rate of 11.2 % per year? That may be hard to achieve. For this fiscal year, it is expected to earn $ 1.32 per share or $ 14.06 Billion. A 11.2 % annual growth implies an additional of $ 1.57 Billion of profit a year. For comparison, Yahoo! Inc. (YHOO) earns a total of $ 1.5 Billion a year.

It is hard to imagine Microsoft to earn an additional $ 1.5 Billion a year, which is what Yahoo! earned for an entire year. Microsoft faces competitions on all sides of its business lines from search engine to its core operating system products. Expecting the company to produce an growth in profit equivalent to the entire profit of Yahoo! may not be realistic at all.

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Disclaimer: The sole purpose of this article is educational. This article is merely the opinion of the writer and is not in any way a buy/sell recommendation regarding Microsoft Corp. (MSFT) or any other securities.

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