I have no financial interest in
I think Microsoft is over-valued given its slow earnings growth, its challenge in competing against Amazon in the cloud and Google and others in office software, and the near-impossible task of earning a return on its Nokia investment.
Before getting into those questions, let's look at the bets on Microsoft's decline. As of June 13, short interest -- the number of Microsoft shares borrowed, sold, and needing to be repaid -- accounted for 1.1% of its total shares, up 6.9% since May 30 to about 82.5 million shares, according to American Banking and Market News.
Analysts are not excited about Microsoft's upside potential -- as of June 28, Microsoft had a consensus rating of “Hold” and a consensus target price of $38.90. On June 12, Zacks rated Microsoft neutral with a price target of $43;
Not all analysts are negative on its shares. On June 5, FBR Capital Markets upgraded shares of Microsoft from a “market perform” rating to an “outperform” rating in a research note with a $49 price target.
Another sliver of good news was that bets on an increase in Microsoft shares soared recently. On June 30, Stock Ratings News noted that Microsoft call options climbed 113% compared to the typical daily volume of 46,710 to 99,376 call options on the stock.
Last time Microsoft reported results, it did pretty well. On April 24, it beat the
Microsoft is expected to report its financial results for fiscal 2014 sometime during the week of July 22. And one aspect of that announcement could be layoffs. Gigaom noted that Microsoft acquired
Microsoft shares have had a decent run in the last year -- up 22% compared to about a 28% increase in the NASDAQ. And Microsoft's cloud strategy -- the one pioneered by CEO Satya Nadella -- has won good reviews while its Azure is seen as a distant number two to Amazon Web Services in the public cloud market.
Unfortunately, Microsoft's biggest cash sources are long in the tooth. A company insider told Gigaom that Windows is losing momentum, its second biggest profit maker, Office, is still going strong, but Google Apps has forced Microsoft to offer more flexible pricing on Office and its successor SaaS-based offerings — cutting into Office margins.
Earlier this year, big investors were adding to their holdings in Microsoft. Valueact Capital Management -- which revealed that it had bought 0.8% of Microsoft in April 2013 and got its President, Mason Morfit, appointed to Microsoft's board in March 2014 -- added 4.4 million to its Microsoft holdings that month -- boosting by 6.6% its stake which represented 22.1% of its total portfolio, according to Morningstar.
On a Price/Earnings to Growth ratio basis -- where a stock's Price/Earnings ratio divided by its earnings growth rate is fair at 1.0, Microsoft looks way over-valued. After all, its earnings are expected to grow a mere 2.9% for 2014 and another 6.9% to $2.88 in the fiscal year ending June 2015. With a P/E of 15.7, Microsoft trades at a PEG of 2.23 on 2015 earnings growth.
Valueact wants Microsoft to become less dependent on Windows and make software for mobile devices running other operating systems while dumping the Xbox and other hardware businesses, according to Bloomberg. That does not seem to be happening nor does Microsoft appear to have prospects for the kind of double digit earnings growth that would justify its current valuation.
