With Microsoft (NASDAQ:MSFT) making major announcements this week and currently trading at its lowest level in months, is the blue-chip member a BUY, a WAIT and SEE, or a STAY AWAY?
Microsoft is one of the world’s largest technology companies, but its name is much more synonymous with boring. Mr. Softee has been slow to make a name for itself in regards to portable devices, online search and social media. It is trying to change its reputation and company fundamentals, but the early results are not encouraging.
The Surface was recently launched by Microsoft as an attempt to gain/protect market share in the consumer and business tablet industry. With a new operating system, built-in kick stand and keyboard, the device does appear to be very interesting, but sales are not attracting the kind of excitement that Apple (NASDAQ:AAPL) and Amazon (NASDAQ:AMZN) seem to create on a routine basis. Speaking to the French daily Le Parisien, Microsoft’s chief executive Steve Ballmer recently said that sales of the company’s new Surface tablet are “starting modestly,” and declined to give an exact sales figure. Microsoft later claimed the comment was in relation to supply issues and distribution.
Digitimes also reports that according to upstream component suppliers, the Surface RT tablet may see sales reach only 60 percent of Microsoft’s forecast by the end of 2012. “The sources pointed out that Surface RT, as well as Asustek Computer’s Windows RT-based tablets, do not have an advantage in terms of a price/performance ratio, while Windows RT’s lack of supporting software from the previous Windows system and can only use software downloaded from the Windows Store has greatly reduced the attraction to consumers.”
A = A-Level Management Runs the Company?
Steve Ballmer joined Microsoft in 1980 as the first business manager hired by Bill Gates. He later became the CEO in 2000. However, his tenure at the the company is already too long according to many. Earlier this year, Ballmer was named the worst CEO of a large publicly traded American company by Forbes.
Adam Hartung explains, “Not only has he single-handedly steered Microsoft out of some of the fastest growing and most lucrative tech markets (mobile music, handsets and tablets) but in the process he has sacrificed the growth and profits of not only his company but ‘ecosystem’ companies such as Dell (NASDAQ:DELL), Hewlett Packard (NYSE:HPQ) and even Nokia (NYSE:NOK).”
Late Monday, the company also delivered another complication for investors looking at Microsoft’s management team. Steven Sinofsky, a 23-year veteran at Microsoft who was widely presumed to be a favorite for the chief executive’s position in the near future and was the man behind the company’s recently launched Windows 8 operating system, has left the software maker. The move was completely unexpected and many are wondering if it was part of a process by current chief executive Steve Ballmer to get a firmer hold on the company. Ballmer reportedly told employees in a memo on Monday that: “Steven Sinofsky has decided to leave the company.” Through a media statement he later added that it was “imperative that we continue to drive alignment across all Microsoft teams, and have more integrated and rapid development cycles for our offerings.”
E = Equity to Debt Ratio is Close to Zero
The debt to equity ratio is a measure of a company’s financial leverage. A high ratio generally represents that a company has been aggressive in financing its growth and operations with debt. While this may improve some metrics such as earnings in the short-term, too much debt can have disastrous effects in the longer-term.
Looking at Microsoft’s financials for its quarter ended September 30, 2012, it has a very strong debt to equity ratio of 0.77. This includes total liabilities and total stockholder equity. In comparison, Google (NASDAQ:GOOG) and Apple have ratios of 0.32 and 0.49, respectively. Facebook (NASDAQ:FB) has one of the lowest ratios in the tech industry with 0.12.
Although Microsoft’s ratio is higher than other major tech companies, it has plenty of cashfor operations and new projects. The company’s total cash position of cash and equivalents and short-term investments equaled more than $66 billion at the end of its fiscal first quarter.
Money isn’t everything, but it sure helps. Microsoft’s healthy balance sheet buys it plenty of time and resources to make attempts to reinvent itself. Unfortunately, it has yet to do so. Despite mostly positive reviews, the jury is still out on whether or not the new Windows 8 will spark a catalyst for the stock price. The same can also be said about the Surface tablet. Some may be quick to write off Microsoft and its consumer product offerings, but the Xbox should provide some level of hope. Taking into account these components of our CHEAT SHEET framework, we find that Microsoft is a BUY for investors seeking a solid dividend north of 3 percent and a cash rich balance sheet. However, shares are a WAIT and SEE for investors looking for strong capital appreciation and an improvement in management.