Between 2003 through 2013, Microsoft stock traded in the $20s. The company’s stock price performance history is one of the most illustrative examples of how stock price performance and underlying business performance can differ dramatically. Even though the price of the stock did not increase during this ten-year period, the profits per share climbed from $0.97 to $2.65 per share. Profits were tripling while the stock was stagnating, which provided another example that we cannot control the “when” part of stock price movements but should be satisfied that we have performed our task when we have identified and purchased shares in great businesses whose profits are growing.
Since 2013, profits have continued to climb, going from $2.65 in 2013 to an estimated $4.65 per share in 2019. The cash position has swelled to over $131 billion, and the company is expected to grow profits at a clip of 14% annually over the next five years. During the past six years, shareholders have received serious capital appreciation, as the price of the stock has climbed from $28 per share to the present price of $136.
Ordinary investors that buy Microsoft stock seem to take their cues from the price of the stock too much. When the company was stagnating in the $20s even while profits were growing, they dumped their shares because it was not adequately rising in value. Now, many are dumping their shares because it appears to have risen too quickly and how has a trillion-dollar valuation.
My own view is that Microsoft is going to continue to grow its profits at a 12-15% annual rate, and those that own the stock today at $136, and elect to hold their shares, will be happy they did so a decade from now.
The company is spending $16 billion per year on research and development. Along with Alphabet, Amazon, Apple, and Cisco, there are really no other publicly traded companies in the entire country that are dedication enormous sums towards rolling out the products of the future. I don’t know what will come specifically of these investments, but if the question is “How does a trillion-dollar company compound wealth for its shareholders at a double-digit rate?”, part of the answer involves spending $16 billion on capital improvements.
The other part of the answer will involve acquisitions, buybacks, and growth of the cloud service divisions.
Every year, it has about $18 billion hitting the bank, after debt is paid, dividends are paid, and research and capital spending is allocated, to dedicate towards acquisitions and share repurchases. Every two years, it could be a company the size of Hershey outright.
As companies of all sizes continue to grow their reliance on Microsoft’s data storage and content infrastructure via the Azure Cloud, profits will continue to climb at a very-high rate because Microsoft’s margin cost is negligible but the amount of money it will be able to bring in per business user and for accumulating data storage will be enormous. And even as data storage becomes cheaper, it will be able to resist the natural risks of commoditization due to company’s concerns about data security–i.e. most businesses will not switch to Joe’s Cheapo Data Storage to store their data in order to save a buck.
The 30 P/E ratio for Microsoft is a bit high right now. I would not be purchasing shares right now. But I also wouldn’t recommend the habit of discounting businesses that are growing profits at a 12-15% rate, are sitting upon $100+ billion in cash, and investing enormous for the future. It is within the realm of reasonable projections that Microsoft could have a 16% or 18% growth year during some particular point in the next five years, in which case, the current valuation would appear quite reasonable. Failing that, I would still take Microsoft stock over the S&P 500 over the next twenty years.