In 2000 Microsoft (Nasdaq: MSFT) took quite a beating in the media. Everywhere you looked, the company was besieged. Initially, when the court ruling went against MSFT, there was a lot of high-fives and celebrating within the tech world.
Ooops! Little did they know that “the bell was ringing,” telling everyone to get out of tech stocks. Few heard that bell.
If you doubt me, look at any tech chart: JDS-Uniphase (Nasdaq: JDSU), Sun Microsystems (Nasdaq: SUNW), Ariba (Nasdaq: ARBA) or hundreds of others. Since the MSFT ruling, they have all headed south. The only question is how much: 50 percent? They were the lucky ones. Many were 70 percent, 80 percent or even 90 percent.
More importantly, many tech companies have had their legs cut out from under them (no access to new capital). It is sink or swim time right now. Be profitable, or be gone.
Right now we see Microsoft as being right where Philip Morris (NYSE: MO) was about 12 months ago. MO was also besieged on all sides; the politicians, the media and anyone else that wanted to pile on was kicking MO.
Look what happened. In the last 12 months, MO has rallied big-time (over 130 percent!). This, in a down-market.
We think Microsoft is a great trade (at minimum) with a chance of reaching the upper $80 area this year.
It appears to us that the legal situation is turning in favor of MSFT. No one is even talking about MSFT being split up any more, and there is a real possibility that before this year is over, MSFT will be free of Uncle Sam’s clutches.
I think Microsoft will soon work out some sort of deal with Uncle Sam for some minor concessions — and then MSFT will be free again.
Given that, I believe you can look for Microsoft to be run more like an investment company in the coming years. Something akin to what Warren Buffett does with Berkshire-Hathaway.
The recent debacle in tech has spawned all sorts of possibilities for Microsoft. Many companies that were piling on MSFT just a year ago saying what bad people they were would now jump at the chance to be acquired by MSFT. Funny how fast things change. But it’s business baby, and sometimes reality is a you-know-what.
Many of MSFT’s competitors (especially in the Internet area) have been severely pummeled by recent market events. They need a helping hand, and good old MSFT is going to be right there to give it to them – probably in the form of MSFT stock.
The currency of stock-for-takeover deals has been devastated. Can Amazon (Nasdaq: AMZN), Priceline (Nasdaq: PCLN), Yahoo (Nasdaq: YHOO) or many other tech-stocks do a stock for stock takeover deal here? Not bloody likely.
Can Microsoft do a stock-for-stock deal? Oh yeah, you bet. They are one of the very few tech companies that can these days.
Despite the tech-carnage, Microsoft is as strong as ever. No debt — not one dime! Plus, a whopping $26.8 billion in cash as of Dec. 31, 2000 (name one company that can say that!!). All cash flow here is free cash flow. This year’s cash flow should exceed $5.5 billion, but even more important, cash flow should continue to grow. MSFT has a balance sheet that is cleaner than a hound’s tooth.
at the margins at Microsoft!
There has been some brain flow away from MSFT in recent years. We see that slowing to a halt in the current market environment.
Recent market events are working for MSFT. The “talent” at MSFT sees the reality of the markets. They are not likely as anxious to start their own shop, or go with a riskier proposition these days. MSFT management can talk them into staying by pointing out that things are still bright, the legal situation is going their way, and they have plenty of cash for new adventures.
A good example of this is Microsoft’s further, more aggressive push into the “dot-net” area. While many here are pulling in their horns for lack of capital, MSFT has big plans and lots of cash flow with which to do it.
That’s what I like to see: MSFT getting its moxy back.
Technically speaking: Look at the recent technical action in MSFT. As the Nasdaq makes new lows, MSFT is trading well above its recent lows. If you look at a yearly chart of MSFT you will see a nice head and shoulders reversal being etched out. The left shoulder being the sell-off of last October, the head being the low of $40 in mid-December and now the right shoulder is being formed in the $48-$55 area. Once MSFT can clear $60 on a close (probably related to some positive news regarding the legal situation), I think MSFT will start getting good ink again on the Street.
Being fallible and having a house payment too, I can of course give no guarantees about anything, so don’t bet the rent on it. But that said, I think a worst-case scenario is a drop to the $45-$48 area.
Conclusion: By the time the analysts start recommending MSFT again, the stock will be much higher. This is the ideal time to buy MSFT. It is doubtful there is a tech company around with a better brain-bank, product-line, balance sheet, or future.