Despite the fact that Bill Gates is extremely wealthy, his once-promising software company has been struggling since mid-2002 after dropping from the $35 mark. The issue with Microsoft (MSFT) has been its inability to increase revenues and profits at the extraordinary rates the company once experienced.
Growth will be difficult for any corporation the size of Microsoft, which has a market cap of $242 billion. But this does not mean that the stock is worthless. Far from it; with $34 billion in cash, or $3.28 per share, Microsoft is still a strong long-term software corporation. The stock now has plenty of financial freedom to create or acquire growing technologies. Microsoft recently disclosed that its MSN Internet division would invest $1.1 billion in R&D during the 2007 fiscal year. And according to the Wall Street Journal, Microsoft is looking into the prospect of investing in Internet media company Yahoo (YHOO) in order to compete with Google, the industry giant in online advertising (GOOG).
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The corporation has its job cut out for them, though, with an estimated 12% five-year earnings growth rate. The company is not pricey, but it doesn't appear to be priced as a growth stock given that it trades at 16.30 times its anticipated $1.44 EPS for FY07.
Its PEG of 1.51 is not inexpensive at first glance, but if you factor in the cash of $3.28 per share, the predicted PEG decreases to roughly 1,0, which is a reasonable pricing. The PEG would also go down if Microsoft can outperform its projected 12% growth rate.
Microsoft does, in fact, merit consideration at the current price. You could want to look into the long-term options, commonly known as LEAPS, if you want to trade the stock but don't want to spend $2,347 for a block of 100 shares. For instance, the $380 per contract in-the-money January 2008 $22.50 Microsoft Call LEAPS currently due to expire on January 18, 2008 (100 shares).
In other words, you stand to lose a total of $380 for the opportunity to benefit from the potential growth of 100 Microsoft shares over the next 20 months. $26.30 is the breakeven price. You would start to profit from your LEAPS if Microsoft breaks $26.30. On the other hand, if Microsoft does nothing, your biggest risk on the initial option play is $380.
Not to be taken as a real option strategy, the aforementioned example is merely meant to be illustrative. I advise you to see an investment professional before deciding to use any strategy utilizing options because of the additional risk they carry.
I hope this article has given you an insight into how you can play Microsoft games without having to break the bank. If you have any more questions or ideas, please don’t hesitate to reach out. Thank you for reading and happy gaming!
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