To Buy, or Not to Buy

One of the most frequent questions I receive about an individual stock: “Michael, is Microsoft stock a bargain?”

Why do I here this repeated question? Probably because investors are looking at Microsoft and seeing a stock that could be bought today for about half the $60 it sold for five years ago.

The bullish Microsoft investors see Microsoft selling at a lower price/earnings multiple than most big software companies. Investors also like Microsoft because it expenses its stock options, while most software companies still do not follow this practice. And it’s the cash— the company generates a huge $3 billion in cash a quarter.

The bearish camp doesn’t like the competition from Linux for Microsoft’s Windows operating system and weak performance by Microsoft’s Xbox game console.

And having finally been fed up with a poor track record in respect to investing it cash, Microsoft announced on July 20th that it would spend $30 billion over the next four years to buyback Microsoft stock while spending another $30 billion on a one-time special dividend of $3 a share.

As you’ve probably guessed, I’m in the bearish camp when it comes to Microsoft stock for the following reasons:

— I like growth stocks. And Microsoft is anything but a growth stock. The company’s revenue has increased by only an average of 12% per year over the past three years.

— The company is expecting sales in the current fiscal year to actually fall 3.4%. To make more money, the company will have to continue slashing expenses.

— Is Microsoft worth $30 billion? That’s the important question. I’ve always looked at Microsoft as a one-hit-wonder company. Take away the Windows operating system and Microsoft has nothing. The company has been beat at the Internet game by many other successful companies.

— Buying back stock and declaring such a huge special one time dividend, in my humble opinion, will only help to make Bill Gates even richer.

Someone once said that companies that do not have to go public, because they generate so much cash, only go public to make their shareholders even richer. To me, this is Microsoft, case in point.