The classic tech play may have lost its luster but makes for a fine retirement holding.
The long-term price chart of Microsoft (NASDAQ: MSFT) looks like a tale of two companies: one, lithe and nimble, it leaps out of nowhere to climb to a mountaintop by 2000, only to become a lumbering giant that stumbles and falls and then, while sustaining more bumps and bruises, claws its way back to the peak.
To illustrate what that means to an investor, consider if you had bought $10,000 of MSFT on the first trading day of 1990 at a split-adjusted price of 43 cents a share. Eleven years later, the price was $42.78 and you would have been sitting on top of a cumulative total return of more than 9,300%, for thrilling average of 57.5% a year. An investment of $10,000 would have exploded in value to $941,000.
But if you bought your first shares on the first trading day of 2000, as of today you would be looking at a cumulative total return of just 1.4%. That amounts to an average annual return of less than one-tenth of one percent — virtually no return at all. An ante of $10,000 at the start would have grossed you just $135.
The lumbering giant analogy is apt. Founded in 1975, MSFT went public in 1976 and became what is still the world’s largest software company, with a pristine balance sheet, massive net cash holdings of more than $60 billion and tens of millions of dollars of free cash flow every year.
But once it became fat and happy, MSFT fell asleep, as PC-based computing – where it dominates – gave way to mobile and cloud-based computing as the next new things.
Over the last 24 months, the giant appears to have regained at least some of its mojo, as MSFT has outperformed the benchmark S&P 500. The stock gained more than 13 points (48%) from August 3, 2012 to the high for this year of $44.87.
With dividends, that translates into an average total return of 23.4% to the S&P’s 20.0% for the past two years. Performance has been even better over just the last 12 months, 39.2% to 15.0%. So is MSFT ready to resume its super-hot growth rate of the past?
Well, hardly, but it does look like things are getting at least a bit better. Wall Street expects MSFT earnings per share to at the rate of 7.5% over the next five years, compared to the 7.3% over the previous five.
But the primary reason for the stock’s performance over the last 12 months is that investors bid up the price faster than earnings grew. As of June 30 – the end of Microsoft’s 2014 fiscal year – trailing 12-month earnings were up 1.9% over 2103’s, but the stock’s PE was up more than 30% (16.2 versus 12.4) .
We’ve already hinted at what brought MSFT low after peaking in late 1999 and early 2000: it was the decline in personal computer sales in favor of tablets and smart phones and the rise of cloud computing, where the software businesses use to run operations resides in cyberspace instead of on hardware on the customer’s premises, paid for by his nickel. The leaders here have been Apple and Google, both in applications and mobile computer applications.
Meanwhile, MSFT – which has a history of issuing less-than perfect products that it improves repeatedly after release, made a number of missteps with such device flops as the Zune MP3 player, Windows ME, MS Messenger, Internet Explorer 6 and Vista, the PC operating system.
More recently, its latest game console (X-Box One) and tablet (Surface) have been disappointing in terms of sales and market share.
Hopes for the future now rest on two factors. One is the appointment of Satya Nadella, formerly head of Microsoft’s cloud business, as the company’s third CEO earlier this year. Good riddance Steve Ballmer. The other is a multi-pronged strategy…
Bottom line: MSFT is a classic Peter Lynch stalwart. It has tons of cash and pays a nice dividend. I would strongly consider it as a retirement holding.
Lawrence Meyers does not own share of MSFT.
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