Microsoft Corporation – Growth Opportunities, But High Valuation

Microsoft Corporation (MSFT) as one of the largest Market Cap in the world. It recently surpassed AAPL (at least for a few days) and it also challenges AMZN for the top spot in Market Cap. It is fair to say that investors who bought in during the 1980s have benefited tremendously from the growth of this company.

Even if the stock price remained quite flat between 2003 to 2012, the company has managed to regain its momentum since 2013.

Let’s now discuss if MSFT is a good investment opportunity for long-term investors.

Financials

MSFT managed to produced solid revenue growth between 2013 and 2018:

Revenues

  • Increased from $77.9B in 2013 to $110.4B in 2018
  • Growth rate of 7.2% between 2013 and 2018

Net Income

  • Decreased from $21.8B in 2013 to $16.5B in 2018
  • Growth rate of -5.5% between 2013 and 2018

Net Margins

  • Decreased from 27% in 2013 to 15% in 2018
  • On track for Net Margins of 16% in 2019

While Revenue grew at a compound rate of 7.2% between 2013 and 2018, net income shrank. Net Margins have dropped by close to 10% during the period. At first, these numbers do not look good. However, MSFT is spending more on its R&D programs. And just like other American giants, they are putting in large amounts for Income Tax Provision. For 2018 alone, they had a Provision for Income Tax of close to $20B. It looks like the company is moving funds back to the USA.

Income before tax were $36.4B in 2018 compared to $23.1B in 2017. This is a solid 57% increase y-o-y. This means that if we look past Tax Provisions, the company has managed to increase its operating income dramatically during the last few years. We will discuss this topic in the next section.

The company’s Balance Sheet is solid. With a current ratio of 2.9, the company has its debt covered quite easily.

The Cash Flow Statements also look good. The company generated more than $43B of positive cash flow in 2018 from its operating activities.

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Disclosure: The author and SI360 portfolio do not own shares of MSFT, and do not intend to initiate a position in the following month.

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