MSFTextrememakeover

Monday, May 07, 2007

Updating the Record

I know what you're thinking - two posts in one day? That's right - and still the same low subscription price!

Actually, last weekend after mowing my moss lawn, I checked my blog where one of my adoring fans asked:

What do you think about the stock now? How is it possible that you write long notes about how the stock is busted and how you told us so - but when it bounces back and actually outperforms, you are silent. I guess you just move on to the next topic/rant.

I've been working on a response off and on during the week - and here it is. BTW, I'm thinking they're not going to like that recent Microsoft's $6M+ Dollar Man post either. Nevertheless, the commenter is correct that the stock has performed better of late. To be honest, I hadn't really noticed since I was away for several weeks and it had been lagging badly prior to that. But if you check now, recent performance plus a more favorable calendar compare makes for some marked improvement. For example, when I penned the specific post on which that comment came through (March 08/07), MSFT had underperformed the NASDAQ on every standard time frame up to 6 years - a fact that I noted at the time. But if you do the same compare now, it has outperforming on the 5-day, 10-day, 1 month, 3 month and 1 year views. Progress - undeniable. Like most shareholders, I'll take it. However, it has still underperformed YTD, and over 2, 3, 4, 5, and 6 years. For example, see the 6-year chart below using just obvious peers SAP, ORCL, HPQ, DELL, and the NASDAQ index (adding high-fliers like GOOG, AAPL, CRM, YHOO, or even EBAY, etc. would have made it unreadable given their dramatically better performance) - that's MSFT on the bottom btw:


Also, note that this better performance comes after ~$24B in buybacks Q4/06 to present (including $6.7B in the last Q alone), which sadly has reduced shares outstanding by only 553M thanks to ongoing dilution - aka paying insiders. As a result (and combined with dividends), MSFT's cash+st investment budget has dropped from $34.161B to the current $28.23B over this period. In other words, it hasn't been free.

So while I'm encouraged by the recent improvement, it's hardly something I'm going to dedicate a glowing post to. But keep in mind that I'm a long-term holder - so this was just a recovery to me. If, on the other hand, you're a short-term holder who picked MSFT up last year at the lows after Ballmer's latest disappointment, then you should be ecstatic with your return. As a long-term holder, I'm also cognisant of the fact that even MSFT's prodigious cash position is eroding rapidly under the weight of these massive buybacks - and that's fundamentally not sustainable. So while there's $22.5B left in approved purchases, MSFT will soon have to slow the pace substantially or face taking cash+st investments below $20B (which imo is unlikely). Therefore, at some point the management team will run out of stock Viagra and price will go up or down based solely on real market demand and non buyback-massaged EPS. For it to go up materially, the market will want to see earnings acceleration, evidence that previous "investments" are finally paying off, and/or bold new moves that show this company isn't headed to irrelevance. In other words, all the things they haven't seen much of this decade. Otherwise, do the math on expected earnings times a sustainable P/E (hint: 25+ on EPS growth of 12% likely isn't it), hope the general market doesn't implode and/or MSFT miss their EPS targets, and look forward to a best-case scenario of modest annual appreciation from here consistent with that (with the normal gut-wrenching plunges along the way, and for as long as MSFT can keep growing earnings).

Now, if you ask what has impressed me lately? What is worthy of a positive post and gives me some optimism that maybe, just maybe, this ol' dog may have some hunt left in it after all? It's this: Silverlight. Way late, but finally some evidence that MSFT is prepared to embrace and go after the Web opportunity versus ceding it to Open Source, Adobe, etc., while busying themselves defending - not very well - the desktop cash cows.

Alas, others are far better qualified to blog about it than I am. So see sample coverage here:

Or just Google Windows Live it. :-)

Update: Added a 6-year chart and related commentary.

Update 2: Corrected some numbers based on commenter feedback and review of the 10-Q.

8 Comments:

  • Silverlight, from the perspective of a real web developer...

    http://diveintomark.org/archives/2007/05/02/silly-season

    Long story short? I don't think MS is going to be able to get the web-savvy to buy into Silverlight.

    By Anonymous Anonymous, at 7:38 AM  

  • > after $24.33B in buybacks since Q4/06

    How do you get $24.33B in buybacks?

    I see $19.7B in stock repurchases for the 9 months ending March 31st (per 9 month table on pg 7 of the Fiscal 2007 Q3 10-Q)


    > including $6.9B in the last Q alone)

    I see $6.7B for Q3 per pg 7 (column of 3 months ending March 31st)


    > reduced shares outstanding by 393M thanks to ongoing dilution - aka paying insiders.

    How did you calculate 393M?

    Regardless, if you are going to consider dilution from stock/option grants, then you need to acknowledge the cash received from that dilution: $5.618B in cash received per Cash Flow statement on page 3 of 10-Q.

    Thus:
    +$19.7B common stock repurchases
    - $5.6B cash from dilution
    =$14.1B net cash from shares
    divide by 393M shares = $36/share

    It is easier to consider them as separate actions. Thus you have

    a) stock repurchases alone:
    $19.7B divided by 728M = $27/share.

    b) stock-based compensation GAAP expense of $1.214B for the 9 months in fiscal 2007 (per the cash flow statement).

    Obviously there are several ways to slice-and-dice this, but I'd observe that some of the dilution is overhang from the previous compensation system (for example, 113M in option exercise by JP Morgan Chase as detailed on pg 7)

    By Blogger Jeff, at 7:48 AM  

  • "How do you get $24.33B in buybacks?"

    It's Q4/06 inclusive to match the one-year period of the chart analysis (on reflection, using "since" might have been confusing - but in context I thought I made it clear the timeframe was 1 year, not 9 months)

    "I see $6.7B for Q3 per pg 7 (column of 3 months ending March 31st)"

    $6.878 (my $6.9) is from the cash flow statement provided in the earnings report. I hadn't reviewed the 10-Q prior to your comment, but that $6.7B number is the more accurate one as it doesn't include trades from Q2 that weren't settled until Q3 - I'll correct it in the post.

    How did you calculate 393M?"

    Diluted total Q4/06 (10.255B) vs diluted total Q3/07 (9.862B).

    "Regardless, if you are going to consider dilution from stock/option grants, then you need to acknowledge the cash received from that dilution"

    Sorry, you lost me on this argument. For example, what cash flow entries are you using to arrive at your $5.618B figure?

    "...but I'd observe that some of the dilution is overhang from the previous compensation system..."

    I agree. Of course, that doesn't make it any less detrimental for current shareholders.

    By Blogger MSFTextrememakeover, at 9:40 AM  

  • >> "How do you get $24.33B in buybacks?"
    > It's Q4/06 inclusive..
    > I thought I made it clear the timeframe was 1 year, not 9 months)

    Got it: 1 year, not 9 months.


    >> How did you calculate 393M?"
    > Diluted total Q4/06 (10.255B) vs diluted total Q3/07 (9.862B).

    Um, a 1 year period would be to use Q3/06 (10.415B) vs Q3/07 (9.862B) which would be 553M share repurchased.



    > Sorry, you lost me on this argument...
    > what cash flow entries are you using to arrive at your $5.618B figure?

    The $5.618B is "Common Stock Issued".

    My point was that it is best to separate share repurchases from dilution discussions. If you want to co-mingle them, then you need to account for the cash received from the dilution in the analysis.


    >> I'd observe that some of the dilution is overhang from the previous compensation system..
    > that doesn't make it any less detrimental for current shareholders.

    Absolutely, but my point was that the dilution of the past few quarters is not necessarily representative of the future.

    By Blogger Jeff, at 11:52 AM  

  • "Got it: 1 year, not 9 months."

    Correct.

    "Um, a 1 year period would be to use Q3/06 (10.415B) vs Q3/07 (9.862B) which would be 553M share repurchased."

    Good point. I'll correct that.

    "The $5.618B is "Common Stock Issued"."

    Ah, now I see what you are referring to - you were using the 9 month stock issued figure.

    "My point was that it is best to separate share repurchases from dilution discussions. If you want to co-mingle them, then you need to account for the cash received from the dilution in the analysis."

    If it was an accounting analysis on net uses of cash, yes. But my comment was simply what buybacks have been (gross) versus the (net) impact on shares out.

    "Absolutely, but my point was that the dilution of the past few quarters is not necessarily representative of the future."

    Agree that there's some reason to think it may be less moving forward. However, as I argued in the post, buybacks are likely to be lesser moving forward as well. So what the net impact will be is unclear. However, I doubt very much that we'll see shares out being reduced at a faster rate than say over the past year. JMHO.

    By Blogger MSFTextrememakeover, at 1:40 PM  

  • Any thoughts on the rumored Yahoo purchase/partnership?

    By Anonymous Brian, at 10:11 AM  

  • "Any thoughts on the rumored Yahoo purchase/partnership?"

    Extremely expensive and risky on the former. Possible but probably not overly feasible - and not a long term solution anyway - for the latter. But Ballmer has a big problem now that his early bravado about catching GOOG quickly is all but a farce. So let's hope egos don't result in some stupid "hail mary" pass. MS needs to either give up and fold in their online efforts with YHOO (also risky, not to mention the likely end of Ballmer's reign as CEO), or settle in for a very long and protracted battle to be at least a relevant and profitable #3 or perhaps #2. I don't see either happening with the current "me-too only later" strategy.

    By Blogger MSFTextrememakeover, at 10:44 PM  

  • With their entry into the patent litigation business, microsoft has effectively killed silverlight, and become a danger for its customers. Look to SCOX for stock performance guidance, as Ballmer has foolishly decided to copy their model.

    By Blogger robilad, at 12:50 PM  

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