Microsoft: Mr. Market creates opportunities

Dear readers,

I am following Microsoft since 2010. It was one of my first companies I looked through the books after I decided to have a new hobby: value investing. I have to admit, I did not understand many of the numbers back then. And 3 years later I know much more about accounting and valuation, but I have many doubts that I  interpret the numbers 100% correctly. As Warren Buffett tells "Accounting is the language of businesses." - its a hard and complex language!

I follow the Peter Lynch approach "invest in what you know". And I understand the economics of the software industry. I began coding software at the age of 14. Since then I am interested in the topic "What makes software companies successful". In 2010 I knew that Microsoft would not beat Android and Googles search and advertisement empire. But I know, that in 10 years there will be at least as many workstations as today running MS Windows and Office. And thats the core of my investment thesis.

Even the cloud mania is grossly over stated. As a programmer I write my software flexible so that it is as independent as possible from any single cloud provider. And its easy because the core concepts behind every cloud service do not differ between cloud provider. What does that mean economically? No barriers to market entry - No moat! In long term no cloud provider is gonna make money. Even economies of scale cannot create a moat because data centers have a nearly fixed size - too small and it cannot be operated efficiently - too big the latency between data center and customer would be too high (amazon has 2 data center one for US east coast and one for US west coast). And worst of all, the cloud market is growing which means plenty of room for competitors!

By eliminating gaming, web, mobile and cloud business units as value drivers of Microsoft, I think the golden nugget is MS Windows, Office and IT essential stuff (database, development, etc.) which are used nearly everywhere and will be used for the next 10 years.

Looking through the books I see plenty of cash, very little dept and stable cash flows of MS gold nuggets. With a valuation of 11x P/E or 7.5x (Market Cap less Cash)/E I see a opportunity to buy a very solid and low risk business at a attractive price which pays dividends.

As "Trading the spread" point out (see: the low dept, high cash, stable cash flows and low dept financing costs creates a catalyst to unlock value through higher leverage and stock repurchases. He sees MS fair value at around $35 now and after unlocking the catalyst at around $70.

I did not buy MS last week because of the upside but because of the low downside of its business model which is in my opinion water proof (I could be wrong there!). To cite several investors: "Watch the downside; the upside will take care of itself."

best regards

PS: Thanks for correcting my spelling and grammar Johann!


Beliebte Posts aus diesem Blog

Silverlake Axis Ltd

US-EU Trade Slowdown?

One Market - Two Perspectives