With all of the momentum that Apple has experienced in the past few months, it becomes easy to forget that the PC remains the king of computers and while Apple has made progress, PC remains the pick for all but a small minority. Among PC users, Microsoft is the king that provides Windows, Office and many other types of software. And while Microsoft’s web initiative has been losing money, it has been gaining market share, which it has been doing even more successfully in the gaming business. Microsoft & Facebook are doing their best to compete with Google and become credible alternatives to searching the world wide web.
So no, Microsoft is not only about Windows & Office and its last earnings report certainly showed that things were going well. Its cash reserves also remain very high which will end up helping investors either through additional investing or increased dividends. That is why, as we had indicated in last weekend’s Premium Newsletter, we are now ready to go long Microsoft based on current valuations. Microsoft might not be the undisputed King in terms of market cap in the technology sector but we strongly believe that Apple’s emergence is actually a good thing for Microsoft as it will help it battle Google on other fronts.
Of course the ironic part is that Microsoft has been partnering up with Yahoo for its web strategy but we are now more than ready to go short on Yahoo. We have been public about our dismay for companies such as Yahoo that try to be good at everything rather than very good at just a few things and how Yahoo seems like it is trying to model AOL. Yahoo has been doing much better lately making several deals with other leaders such as Zynga that will help the company refocus on its core. But the problem is exactly that, what is Yahoo’s core? It used to be the top US publisher in terms of pages viewed but that is no longer the case. We have been patient with Yahoo this year only going short once (it did not turn out so well) and even discussed the possibility of buying the internet media company but this time around, its valuation just looks expensive when we compare it with Microsoft.
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The main points that stick out when looking at the numbers are:
-P/E ratios do not make much sense when taking in perspective current earnings and sales growth
-INO Trend analysis certainly favors Microsoft greatly
-Analysts also agree!