Microsoft Corporation (NASDAQ: MSFT) and Windows 8 Are On Sale

There is a consensus in play right now in the technology sector and it could be very profitable for investors willing to get in now and position themselves for the revaluation of an opportunity. Microsoft has a dominant position in the technology industry and with Windows enjoying almost a 90% market share in the operating systems business and the Microsoft Office Suite camping on a big chunk of the professional software market, this company is poised to experience growing profits over the coming years.

Investors appear to be anticipating a big drop in the market share of the company because of the rising threat arising from sales of tablets. Analysts seem convinced that iPads and Android tablets will eat the market share of PCs, thus reducing the overall grasp of the market by Microsoft.

Lets take a closer look at what the future has in place for Microsoft. First, Windows 8 is in the pipeline and according to the teaser preview provided by the company last week, this version of Windows promises to be quite different from it's predecessors. If you haven't seen it yet, take a look on their official website here. Windows 8 seems more exciting and more intuitive, showing that the company is working to create products that are more in line with what the competition, namely Apple and Google, are currently doing. Also they are not just imitating their competitors, they are innovating and bringing something new to the marketplace. The big news with Windows 8 is that it will be compatible with the touch technology, we will therefore expect to have an announcement in the coming months of a Windows 8 tablet.

 EPS for 2011 is an estimate and data for 2012 and after are projections.

The current attractiveness of the company is phenomenal from a fundamental standpoint. Over the past 10 years, Microsoft has been able to grow sales by roughly 10% per year because of good pricing power and an average 4 year product cycle. Assuming the company can grow it's sales by 7% over the next ten years and that most other expenses grow in line with sales, we end up with a company valuation of 33$ per share. At current prices, this provide investors getting in right now with a 40% return as the market starts to realize how undervalued the company is. 


The recent price of 23.91$ implies that Microsoft will be able to grow EPS by only 3% per year over the coming 10 years! We know that in reality the company has been able to grow this metric by an average of 13% over the past five years.

Also, you are paid to wait, as the shareholders currently enjoy close to a 3% dividend yield and Microsoft certainly has enough cash on hand, even following the recent acquisition of Skype, to sustain a healthy growing dividend. Long term investors should see the current price levels of the company as a great buying opportunity.

Using a price-earnings multiples valuation, we also come to the conclusion that the company is undervalued. The P/E ratio of the company is currently at 9.47. Over the past fire years, the average P/E ratio of Microsoft was 16, with a high of  23.7, which doesn't seem very much out of this world. With a trailing twelve months EPS of 2.52, we end up with a price per share of 40$ using the five years historical average P/E of Microsoft.

In my humble opinion, EPS for FY 2012 of Microsoft will hover around 3$ per share as the company finally catches up with it's competition and sales of Windows 8 pick up. By using once again our historical P/E of 16, we come up with a stock price of 48$. It is clear that current prices grossly undervalue the profit potential of the company as it is able to generate an incredible amount of profits for it's shareholders.

As you can see, these two methods allowed me to come to an approximate value for the shares of Microsoft ranging from 33$ to 48$ one year from now with fairly conservative assumptions. Acquiring a position now will be very beneficial to shareholders as those intrinsic values allow them to reap substantial profits. There is very little downside left and any good news by Microsoft will have a positive effect on the stock price.

Full Disclosure: The author is Long MSFT

The Comeback of the US Dollar?

The following graph of the US Dollar Index tells a story that can be summed up in the following terms. There seems to be change in sentiment regarding the way people perceive their positions relative to the US Dollar. This is all translating into a major change in the way Forex traders are positioning themselves regarding the future of the US Dollar.

Recent economic news on each side of the Atlantic have heavily influenced the strength of the American currency. In the US, it is clear that talks by the Federal Reserve to end of quantitative easing, QE2 on time, and that there probably is no QE3 in sight. Economic data on employment is improving and recent speeches by Fed's Chairman Ben Bernanke lead to think that the US economy is getting stronger.

Expect for the specific cases of Germany and France, economic data for Europe is coming in short of expectations and the continued Greek sovereign crisis is weighting on the Euro. As long as the market has no certainty as to what will happen with Greece's debt, forex investors will keep expecting the worse as time passes by and will fly back to the US Dollar.

Looking at the chart at the beginning of this post, there a long term reversal is in place for a comeback of the US Dollar that should last many weeks. Shorting the Euro and getting long on the US Dollar will prove to be a winning trade as long as a bond crisis still looms over Greece.

Google (NASDAQ: GOOG) is Releasing it's Chromebook

I recently fell on a pretty interesting article from the Street.com: The 5 Dumbest Things on Wall Street: May 13 - TheStreet. It is about major blunders made by big public companies or people employed by them.

I was mostly intrigued by the article relating to Google (GOOG) and their newly issued Chromebook, described by Google on the Chromebook website in the following terms:

A Chromebook is a mobile device designed specifically for people who live on the web. With a comfortable full-sized keyboard, large display and clickable trackpad, all-day battery life, light weight, and built-in ability to connect to Wi-Fi and mobile broadband networks, Chromebooks are ideal for anytime, anywhere access to the web. They provide a faster, safer, more secure online experience for people who live on the web, without all the time-consuming, often confusing, high level of maintenance required by typical computers.

It will come in two models, one manufactured by Samsung and the other by Acer and will be available on June 15th. The author of the article on TheStreet.com discusses the fact that the Chromebook comes at a time when mini-notebooks are simply outdated and that linking the product to a 3 years contract on a data plan was a silly move to take.

 

This point of view seems to be adopted a long time before the product has even had a chance to get going in the marketplace. The target costumers of the Chromebook are people who spend most of their time on the web and do not us their computer for much other use. Google seems to be targeting a niche market and it is reasonable to think that the people in the marketing department saw at least a medium term opportunity for Google.

These notebooks will be well adapted for people who are already accustomed to the Google product line but they still need to offer some features that many people are still looking for when acquiring a computer. First, Java is not supported by the Chromebook. If it is supposed to appeal to regular Internet users, this is a functionality that will have to be addressed.

The Chromebook doesn't yet support networks that require security certificates and this is an issue considering that most enterprise wireless networks are secured. As noted on TheStreet.com, it's not currently possible to transfer owner privileges of your Chrome notebook to another user account unless it is set back to back to it's set back to it's initial state, loosing all previously recorded data.

There are only some of the few drawbacks of the Chromebook but I am pretty sure it will provide Google with a business segment that will constantly expose it's users to the advertising distributed by the company, thus increasing revenues.

Full Disclosure: The author does not have a position in GOOG.