Microsoft Corporation MSFT [Nasdaq] | Equity Research Report

Last Price Fair Value Consider Buy Consider Sell Uncertainty Economic Moat Stewardship Morningstar Credit Rating Industry
28.66 USD 32.00 USD 22.40 USD 44.80 USD Medium Wide A AAA Software – Infrastructure
Close Competitors Currency(Mil) Market Cap TTM Sales Oper Income Net Income
Microsoft Corporation
Apple, Inc.
Google, Inc.
Oracle Corporation
USD
USD
USD
USD
245,201 65,759 26,732 20,596
312,481 65,225 18,385 14,013
204,538 27,555 9,880 7,936
159,303 31,993 9,831 6,776
Morningstar data as of January 18, 2011.
released in
late 2009, and Office 2010, the next version of
the popular
productivity suite, is scheduled to follow later
in 2010.

Valuation, Growth and Profitability
Our fair value estimate for Microsoft is $32 per share. We

have extended our explicit forecast for Microsoft out to
2019 to
incorporate the decline of Windows and Office, as
well as the
growth of Windows Azure. We expect
compound annual revenue growth
of 1.9% over the next
decade. Given the cloud disruption, Windows
and Office
will be empty shells by 2019 and contribute immaterial

amounts to revenue by 2019. The vast majority of
Microsoft’s
revenue will come from Azure, which we
believe will be a very
profitable business. The very high
technical and financial barriers
to entry to building a
cloud, along with the massive returns to
scale, point to an
industry with a handful of very large players.
While some
cost savings will be shared with customers, we expect a

significant portion of the economic profit to flow to the
cloud
providers.

Risk
The threat to Microsoft’s core businesses of Windows and

Office posed by cloud computing is the dominant risk.
Google is a
capable competitor that is intent on disrupting
Microsoft’s cash
cows to restrict Microsoft’s ability to
disrupt Google’s cash cow
in Internet search. Regulatory
and antitrust issues are also an
issue.

Bulls Say
The release of Windows 7 should entice many
enterprises and
customers who skipped Windows Vista
to finally upgrade from Windows
XP.
With a warchest of cash and an AAA debt rating,
Microsoft is
one of the few firms with the technical and
financial resources to
invest heavily in cloud
computing.
Windows Azure enjoys many inherited advantages such
as
Microsoft’s existing base of third-party Windows
developers.
The Bing search engine is Microsoft’s most viable effort
in
Internet search thus far, and its partnership with
Yahoo gives both
companies their best chance to chip
away at Google’s
dominance.

Bears Say
Cloud computing is a disruptive force, and Microsoft
may be
handicapped from competing fully by the need
to protect its legacy
businesses.
The growth of netbooks and emerging markets will
pressure the
selling prices of Windows. Piracy is also a
larger problem in
emerging markets.
Although Microsoft has settled a majority of its
antitrust
issues, the firm will continue to operate under
a regulatory
microscope. Such regulatory oversight may
make it difficult for
Microsoft to raise prices or further
its market share
dominance.

Financial Overview
Financial Health: Even after buying back $60 billion of
stock during the
last five years, Microsoft’s fortresslike
balance sheet still
boasts $40 billion of cash and
long-term investments against only
$39 billion in total
liabilities.

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