Sunday, August 15, 2010

Microsoft Finally a Buy?

Microsoft would appear to be trading at one of its lowest p/e ratios in some time. It traded as high as 40 in 2001 and now it is at around 11.5. Though Microsoft operates in an fast-changing industry I would normally avoid, Microsoft does have some notable competitive advantages in the form of switching costs that many technology companies lack. The most salient feature about this investment is that Microsoft trades at a free cash flow yield (free cash flow per share/price per share) of over 10% at a price of about $24.4

In an article on the Graham and Doddsville newsletter, the investor Glenn Greenberg was quoted as saying "if you could buy a decent - not great, but decent quality business with a 10% free cash flow yield - my experience is that you would rarely lose money." Microsoft is certainly a decent business, maybe not the great business it used to be, but one which you can imagine being around in the next 10 years. Microsoft has been facing steep competition from open software and free operating systems for years, but they've held their ground. Even still, their most recent operating system was well received and even though their game unit only contributes to 1% of earnings, it has been gaining market share on Nintendo and Sony.

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