Microsoft’s (MSFT) huge core business, its acquisition strategy and cost reduction initiatives are driving strong cash flows and earnings growth. That said, shares are currently trading at 15.0X the trailing twelve months earnings compared to 35.5X for the peer group and 29.6X for the S&P 500.
While we recognize that competition continues to increase and the company’s dominant position in the PC market could erode, we note that attach rates of the new operating system are increasing. We believe that Microsoft is poised to benefit from new product cycles in both the enterprise PC and server markets.
Over the past five years, MSFT shares have traded in the range of 8.6X to 24.9X trailing twelve months earnings. Therefore, it is currently trading below the middle of the historical range. shares had a great run in 2009, but the shares are down 5.1% since the beginning of the year. However, we expect the shares to trade higher since we are very optimistic about the new products and expect the company to benefit from new product cycles.
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