Microsoft Corporation

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Microsoft is Suddenly Dangerous to Apple and Google


Fundamentals  image


##Date##24 Aug 2015

Financial Charts on MSFT Click Here

Microsoft has become so adaptable and so innovative, I will introduce a legitimate and compelling argument that it could hold the greatest promise of large scale growth (with focus) within the next few years in the entire mega-cap technology sector including Google (GOOGL), Apple (AAPL), Facebook (FB), (AMZN) and Intel (INTC). It’s absolutely stunning where new CEO Satya Nadella is taking this firm and equally stunning how dangerous the firm is becoming in direct competition with Apple iOS and even Google Search.

Perhaps the most interesting operational change that MSFT is undertaking surrounds how it has opened up its platform to other operating systems. With an investment in Cyanogen, which creates its own flavor of Android, MSFT has boldly thrown even a greater monkey wrench into the Android chaos. Microsoft's adaptability and dare we say, flexibility, are proving to be stunning changes from the once stodgy and immovable firm of the past decade.

Android and iOS
In late May of 2015, Microsoft announced that it had created partnerships with nearly two dozen Android OEMs to install, you guessed it, Microsoft Office, OneDrive and Skype onto their Android powered tablets. Microsoft is looking to explode the revenue the firm already generates from Android users and this feels a lot like what MSFT did to Apple in the days of the Mac, where more money went to MSFT than AAPL for every Mac sold. While the death of office was once a forgone conclusion, now it's just foregone. Office 365 and Software as a Service (SaaS) is exploding.

Microsoft is fulfilling CEO Satya Nadella's goal of going platform-agnostic. The company is now on the attack and for the first time in a long time, feels dangerously competitive and innovative. And let us not forget business cloud computing which is on track for over $6 billion revenue this year.


Windows 10
Even more evidence of flexibility, MSFT is dropping the most hated browser on planet Earth (Internet Explorer) and introducing Project Spartan with Windows 10. And while we're at it, MSFT heard the jeers so loudly surrounding Windows 8, it just went ahead and skipped Windows 9 and went straight to Windows 10. That's circumstantial evidence of a legitimately different core value system within the firm.

Financial Charts on MSFT Click Here

Microsoft is approaching this OS in a totally different way than ever before. The company is giving Windows away on mobile devices, and free upgrades to those with Windows 7 or Windows 8. Windows 10 is Microsoft's echosystem, just as iOS is for Apple (AAPL) and Android is for Google (GOOGL) (although the real echosystem for Google is Google Search). Given all of these new approaches, perhaps the single most promising evidence of a true pivot for MSFT was heard from Chief Marketing Officer Chris Capossela said at the company's Convergence conference in March:

"If you look what Apple advertises on TV, at least in the U.S., it's all iPhone and iPad, and yet you see all the lines that connect their ecosystem. So they can focus their marketing dollars on a very small number of things, be very disciplined, but because they've engineered their things to work together, one product naturally leads to the next product without any marketing at all. Very efficient marketing to build your marketing into your products."


Now think about Surface, Cortana (Microsoft's version of Apple's "Siri") and Bing (yes, Bing). Satya Nadella said Bing would turn its first ever profit in 2016 in the most recent earnings call by gently weaving people into usage from the Win 10 echosystem.

Now there is a little bit of ugly. In the most recent earnings report in late July MSFT laid off 7,800 and noted impairment charges of over $7.5 billion and, since it needed more, there were restructuring costs of around $800 million. The vast majority of this surrounded the end of the Nokia phone business. For fiscal year 2015, impairment, integration, and restructuring charges totalled $10 billion, compared with $127 million in the prior year (Source: 24/7 Wall St.).

Cloud Computing and More
Commercial cloud revenue rose 88% and the firm announced over 15 million subscribers to Office 365 -- the clever subscription model to office. Software as a Service (SaaS) is the new black in software and MSFT is not being left behind.

One of the more interesting facts surrounding MSFT is how much the firm spends on research and development (R&D). In fact, Microsoft spends more in R&D than every company in North America across all sectors just surpassing Intel (INTC), Amazon (AMZN) and Google (GOOGL), and outspending Apple by over 50%. In the scatter plot below we chart R&D on the y-axis and equal space the x-axis, including only firms over $50 billion in market cap, but of all sectors.


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Gottlieb Risk Factor  image

MSFT has elevated stock price movement potential over the next 30-days (movement up or down). Although several proprietary factors affect the risk rating, in particular for MSFT some of the items driving the rating are:
↳  High 30-day implied volatility relative to the last year. A large absolute stock return over the last 3-months (-8.3%).

    The stock price range reflected by the option market over the next 30-days is ($39.10, $46.40).

Technicals   |   Support: 40.47   |   Resistance: 47.32    image

Swing Death Cross Alert: The short-term 10 day MA is now below the 50 day MA.

MSFT has a one bull (lowest rated) technical rating because it's trading below the 10-day (short-term), 50-day (medium-term) and 200-day (long-term) moving averages.


I remind all readers that a report just like this one is available for any company for free on No e-mail. No login. Free. Forever. Period.

Let's look at the core elements that drive the company's fundamental rating.

Fundamentals Rating Summary



Stock Returns and Chart

MSFT is down -8.3% over the last three months and down -3.1% over the last six months. The stock has returned -5.1% over the last year.

Before we dig into the fundamental trends that drive the rating, let's look at a two-year stock chart with regression channel and 10-day momentum (on the bottom). image
Click here to interact with this stock chart

Now let's examine the visualizations of the critical financial measures.


Revenue (TTM US$ Millions) 93,58086,83377,849RISING

Revenue over the trailing twelve months (TTM) for MSFT is rising, up a healthy 7.8% year-over-year, and up more than 20% over the last two-years.

What do all these numbers mean?
MSFT's fundamental rating benefited these results:
1. The one-year change was positive (but no extra points were given for a large percentage increase).
2. The two-year change was positive.

Let's look at Revenue (TTM US$ Millions) in the chart below.

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Net Income (TTM US$ Millions) 12,19322,07421,863image

So, while there's a lot of really positive momentum in this company, we must note the declining net income. Yes, some of it is due to the massive $10 billion write-downs from the Nokia business, but even looking at adjusted EPS, it's not exactly "wowing" anyone. Having said that, if cloud computing, SaaS, Windows 10 and the mobile strategy with iOS and Android work (or any combination of those), MSFT will be looking at extremely high margin new business which could thrust earnings higher rather dramatically.

In our next chart we plot Net Income (TTM US$ Millions) in the blue bars and the quarterly results in the gold line (which is really ugly because of the charge-off). Note the falling bars from a year ago (four quarters ago).

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Research and Development (US$ Millions) 3,0943,1232,783FALLING

While we opened this piece showing how much MSFT spends on R&D, it might come as bit of a relief to know that the firm has actually spent a little less on R&D in the most recent quarter from a year ago. Granted it's a 0.93% drop, but some sanity must take hold. R&D is up 11% over the last two-years.

R&D per dollar of revenue for the latest quarter is $0.139. Last year this measure was $0.134 (it's rising, but just a little).

In our final time series chart we plot Research and Development (US$ Millions) in the blue bars and R&D per dollar of revenue in the orange line.

Click Here to Interact With This Chart


Microsoft has so many new high margin opportunities around the corner, it's hard to imagine that this was the old forgotten mega-tech. Based on the wonderful pivot led by its new CEO surrounding Windows 10, mobile, iOS, Android, cloud computing, Software as a Service (SaaS), and the incredibly compelling echo-system story, you could make an argument that MSFT is innovating more than any other mega-cap tech not named Google (GOOGL). You could also make an argument that Microsft has the most focused innovation of every company, even more so than Google (GOOGL) (let's admit it, Google is amazing but it's kind of all over the place).

It's time to stand up and look at Microsoft again. The next chapter in this epic saga could be the best yet.