This Day On The Street
Continue to site right-arrow
This account is pending registration confirmation. Please click on the link within the confirmation email previously sent you to complete registration.
Need a new registration confirmation email? Click here

Microsoft - A Compelling Trade

TheStreet Premium Services

A complimentary preview
of Options-Profits Previews


All Things D reported earlier this week that Microsoft (MSFT) is considering a restructuring program that could reduce the number of operating divisions at the tech giant to four, from eight currently. Late last year, the company announced plans to s shift its focus to devices and services, including internet-based products, the Surface and Xbox, and away from the Windows platform.

The management suite has seen a bit of a shake-up recently, with the departure of CFO Peter Klein which was announced in April and the announcement this week that CIO Tony Scott will be leaving. There is speculation that Satya Nadella, head of the server business, Don Mattrick, who runs Xbox, and Tony Bates, president of Skype will have more prominent roles in the executive suite going forward.

In April, activist investor ValueAct Holdings LP disclosed a stake of about $2 billion in MSFT (less than 1% of the shares outstanding). ValueAct has been known for seeking board seats or asking for other changes at companies in which it invests in the past. While its small stake may not lead to any activism as some may hope, ValeAct does believe the company is undervalued by other investors.

Since reporting fiscal third quarter earnings on April 18th, the stock has popped more than 20%. This move has accounted for most of its greater than 30% move year-to-date. However, MSFT still has a cheap valuation. It trades at an 11.5x forward P/E, a discount to its ten year average of 14x, and to the S&P 500 which is currently trading at 14.9x.

When you take into consideration the potential reorganization mentioned above, catalysts such as the momentum in the cloud space, the seasonally stronger second half demand for technology products (and subsequent stock rally), the Windows 8.1 release, and the company's cash flow position, it's easy to see how this stock could continue to move higher into year end. At the end of the third quarter MSFT had nearly $9 per share in cash on the balance sheet and offered a 2.5% dividend yield. The dividend is expected to be boosted in September, which should drive the yield back to 3%.

Select the service that is right for you!

Action Alerts PLUS
Try it NOW

Portfolio Manager Jim Cramer and Director of Research Jack Mohr reveal their investment tactics while giving advanced notice before every trade.

Product Features:
  • $2.5+ million portfolio
  • Large-cap and dividend focus
  • Intraday trade alerts from Cramer
  • Weekly roundups
TheStreet Quant Ratings
Try it NOW
Only $49.95/yr

Access the tool that DOMINATES the Russell 2000 and the S&P 500.

Product Features:
  • Buy, hold, or sell recommendations for over 4,300 stocks
  • Unlimited research reports on your favorite stocks
  • A custom stock screener
  • Upgrade/downgrade alerts
Stocks Under $10
Try it NOW

David Peltier uncovers low dollar stocks with serious upside potential that are flying under Wall Street's radar.

Product Features:
  • Model portfolio
  • Stocks trading below $10
  • Intraday trade alerts
  • Weekly roundups
Dividend Stock Advisor
Try it NOW

David Peltier identifies the best of breed dividend stocks that will pay a reliable AND significant income stream.

Product Features:
  • Diversified model portfolio of dividend stocks
  • Alerts when market news affect the portfolio
  • Bi-weekly updates with exact steps to take - BUY, HOLD, SELL
Real Money Pro
Try it NOW

All of Real Money, plus 15 more of Wall Street's sharpest minds delivering actionable trading ideas, a comprehensive look at the market, and fundamental and technical analysis.

Product Features:
  • Real Money + Doug Kass Plus 15 more Wall Street Pros
  • Intraday commentary & news
  • Ultra-actionable trading ideas
Options Profits
Try it NOW

Our options trading pros provide daily market commentary and over 100 monthly option trading ideas and strategies to help you become a well-seasoned trader.

Product Features:
  • 100+ monthly options trading ideas
  • Actionable options commentary & news
  • Real-time trading community
  • Options TV

Partners Compare Online Brokers

Top Rated Stocks Top Rated Funds Top Rated ETFs