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 Trading
Alert: Microsoft. Need we say more? |
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  Some
perspective is in order. The recent EU sanctions against Microsoft (NASDAQ:
MSFT) total some $613 million. That figure represents a paltry
1.2 percent or less of the company’s $50 billion-plus cash mountain. Even
if the company decided to pay the fine, it would hardly cause a blip in
virtually any of MSFT’s ratios.
But Microsoft isn’t going to pay
the fine. The company intends to appeal, which makes the ruling moot for
paying the fine or releasing any source codes for probably half a decade,
if ever. By then Microsoft will likely have innovated to such an extent
as to move the business, its revenues and, of course, its share price ahead
nicely, thank-you.
 Over
the last couple of years, MSFT has been stuck in a fairly wide ($23-$30)
trading range. The bottoms are routinely met with volume spikes that tend
to carry the shares to the higher end of the range within a quarter or
two. Over and above the fact that Microsoft is a great company, the shares
are great vehicles for traders.
We believe that both long-term
and aggressive traders should begin accumulating MSFT around the $25 level
with a target of $30 or better within the next 6-12 months.
Hang on it’s going to be a bumpy
ride.
 Will
the ride be smooth? Not likely. Option players should look at both the
calls for leverage and the puts for protection. A stop loss at around $20
–or an appropriate put option--would be prudent.
As we are within spitting distance
of the two-year low of around $22, aggressive traders especially should
seriously consider taking a punt in the shares.
Fundamentally, MSFT also stacks up
well. Projected earnings per share for fiscal 2005 are currently $1.27
evidencing a forward price earnings ratio --with the shares at $24.75--
of 19 times. If you strip out the roughly $5 of cash per share, you are
buying the business at under $20 a share. The average price earnings ratio
in MSFT’s sector of application software is currently north of 40 times.
Interestingly, the company’s lowest price earnings ratio in 5 years has
been 19 times. The highest during that period was 70 times.
And MSFT has no appreciable debt
to speak of.
I agree with the analysts, he
said, cringing…
So what’s the problem? Perception,
as usual. That said, most analysts are actually (finally?) on the right
side of this equation as roughly 25 of the brokerage intelligentsia rate
the shares as a moderate buy. Although they have been buyers as the shares
have moved down, better late than never. Virtually any recommendation will
be right, eventually.
Microsoft has become the high-tech
equivalent of big tobacco and fast food. Evil Empire? Maybe. Are their
problems with its predatory practices? Sure. Is it monopolistic? Not really,
more likely part of a software oligopoly. And when you’re the biggest kid
in the schoolyard, noses do get bloodied. Does that mean it’s a lousy company
or that the growth is over?
No.
Revenue estimates for Microsoft’s
2005 fiscal year are ranging between$37- $39 billion. In 2000, MSFT’s revenues
were around $22 billion. There are rumors of a dividend increase this summer.
 Risks?
This is Microsoft. Controversy follows this company like a feral dog. But
technically and fundamentally, the ship is sound and there’s always the
possibility—more likely potential—that it will use that massive cash position
sooner rather than later to do something neat for the company, its shareholders
or both.
If I were Bill Gates I’d save the
legal fees and simply launch a takeover bid for Europe.
Got comments, questions or suggestions?
Send 'em on over:
Editor@smallcapdigest.net
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or inquiry, please send it to our physical address:
TGR Group, LLC
3525 Del Mar Heights Rd #334
San Diego, CA 92130
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