Wednesday, January 5, 2011

Microsoft: Stock vs Business Performance

Microsoft (MSFT) has been a go nowhere stock for a decade (a fact seemingly mentioned daily on business news) but not because it lacked in business performance. A decade ago, Microsoft generated revenue of ~ $ 25 billion and was earning just over $ 7 billion dollars each year. Microsoft, a large company when it entered the decade, was able to grow that revenue from $ 25 billion to $ 68 billion and earnings from $ 7 billion to north of $ 20 billion in the past ten years.

So more than a respectable decade of work. I'm not a huge fan of Microsoft but its business performance is sometimes ignored because the stock has not performed.

For a short time period in the year 2000, Microsoft had an enterprise value (market cap - net cash on the balance sheet) of over $ 600 billion. Just over a decade ago an investor was paying more than $ 600 billion in enterprise value for $ 7 billion of demonstrated earning power. Today, an investor is paying a bit over $ 200 billion  in enterprise value for more than $ 20 billion in earning power.

Also, consider that there is now 20% less shares outstanding compared to a decade ago. So the stock didn't do well because it entered this past decade overvalued.

The business did just fine.

Adam

Small long position in MSFT
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