Is Microsoft the Best Value in Tech Stocks?

Tech investors take notice, Microsoft (NASDAQ: MSFT) is far from dead. The software giant just demonstrated that it is the best value in technology stocks.

Microsoft just turned in a stellar earnings report for second quarter 2017 that contains such incredible numbers. Value investors had better take notice because Microsoft also demonstrated that it is one of the best money makers in the market today.

Some of the great numbers for Microsoft I found at ycharts include:

  • $89.95 billion in revenues reported on June 30, 2017. Microsoft’s revenues have started to grow again. They were $87.25 billion in March 2017 and $85.32 billion in June 2016.

 

  • Microsoft’s revenues grew by $4.75 during the 12 months that ended on June 30, 2017. That demonstrates its’ business model is still extremely lucrative.

  • $132.98 billion in cash and short-term investments on June 30, 2017. This is the number that blew me away.

 

  • The amount of cash in Microsoft’s bank account grew by $19.74 billion between June 2016 and June 2017. Microsoft reported $113.24 billion in cash and short-term investments in June 2016, and $132.98 billion a year later.

 

  • A net income of $21.20 billion on June 30, 3017. This was up $3.39 billion from March 2017, when Microsoft reported $17.81 billion in income. It also marked a $4.4 billion increase over second quarter 2016; when the company reported an income of $16.80 billion.

 

  • A profit margin of 27.93% on June 30, 2017.

 

  • A free cash flow of $8.772 billion on June 30, 2017.

  • $8.408 billion in cash from financing on June 30, 2017.

 

  • $39.51 billion in cash from operations on June 30, 2017. This marked a $2.54 billion increase over March 2017 when that number was $36.67. It was also a $6.18 billion increase over June 2016 when Microsoft generated $33.33 billion in cash from operations.

 

  • Assets of $241.09 billion on June 30, 3017. Microsoft’s assets increased by $16.07 billion during second quarter 2017; they were estimated at $225.02 billion in March. The same assets grew by $47.40 billion, nearly $50 billion, over the past year. The assets were valued at $193.69 billion in June 2016.

  • A market capitalization of $556.91 billion on August 9, 2017.

 

  • An enterprise value of $513.86 billion on August 9, 2017.

 

Is Microsoft the Perfect Value Investment?

As you can see Microsoft is a company with a vast amount of float and that float is growing by leaps and bounds. All this lends credence to the argument that Microsoft might be the perfect value investment.

Some other evidence that Microsoft is the perfect value investment includes:

  • It’s a company out of favor with Mr. Market because it manufactures software and operating systems for PCs. The business is “so last century” even though it is generating a vast amount of cash.

 

  • Microsoft is not sexy. Even though Windows, Microsoft Word, Excel, Outlook, LinkedIn, PowerPoint etc. are profitable they are not very hip or sexy. There’s no social media, here, only good basic programs that real people use every day. Disclosure: I wrote this little essay on Microsoft Word on a PC with a Windows operating system.

  • It is in a great position for expansion and acquisition with all that cash. With the cash Microsoft had in the bank at the end of second quarter 2017, it could have bought PayPal (NASDAQ: PYPL) and still had $65.54 billion left. PayPal had an enterprise value of $67.44 billion and a market cap of $71.54 billion on August 9, 2017.

 

  • Microsoft investors were rewarded with a 30.01% return on equity on June 30, 2019.

 

  • Microsoft is scheduled to pay a really good dividend of 39¢ a share on August 15, 2017. That’s a three cent increase over the 36¢ paid in August 2016.

 

Microsoft is an almost perfect value investment because it is a great income stock and a wonderful growth stock. If you were looking for a perfect example of a 21st Century Widows and Orphans stock for your portfolio, Microsoft would be it.

One Potential Problem at Microsoft

There is one potential problem at Microsoft for investors and it is an interesting one. The problem is the weak U.S. dollar which seems to be getting weaker.

The greenback lost 10% of its value during the first seven months of 2017 when compared to the Euro. The Euro was trading at $1.19 on January 6, 2017 and $1.03 on August 3, 2017, CNN Money pointed out.

The weak dollar is a potential problem because it means Microsoft might be overvalued. It also reduces the purchasing power of all that cash in the bank. This of course gives Microsoft a strong incentive to make acquisitions or increase the dividend to jack up the stock value.

Is it a Inflation Induced Bubble?

Another danger here is that some stocks such as Microsoft, Amazon (NASDAQ: AMZN) and Alphabet (NASDAQ: GOOG), might be in an inflation-induced bubble.

Their value is growing because nervous investors are moving as much cash as possible into stocks not because of performance. People are buying stock because they’re afraid their cash will lose its’ buying power. There’s no actual evidence of inflation out there; although a good case for deflation can be made, but scared investors think it is coming.

The good news here is that I think Microsoft is one of the few big tech stocks that might be undervalued. Several tech favorites including Amazon; Alphabet (NASDAQ: GOOGL) and Facebook (NASDAQ: FB), look overvalued right now.

Despite that Microsoft investors will make money even if the stock is overpriced. This makes Microsoft a great tech stock to buy and hold for the long term right now because it will make money even if inflation comes.