Microsoft Project1 6ALL

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Microsoft (MSFT NYSE) Project 2-3 for Ron Sweet Oct 15 William Raymond

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Microsoft by William Raymond

Project 1

The software industry writes code that ispertinent to applications and for business

and consumers that help them arrange,

organize, maintain, their daily activities.

The industry started in the 1960s and

intensified in the mid 70s. As the demand

for raw data, and how to organize it

became evident to the market, so did the

business as software industry. One of the

first advocates that software could makehuge margins was none other than Bill

gates. Chairman of Microsoft, Bill gates

revolutionized the computer software

industry in my opinion. I remember hearing

stories about my friend Tom who was a law

student back in the 70s stated that he had

to carry punch cards to a keyboard looking

terminal and align them very nice to get the

machine to work. The software industry isfacing new mergers and alliances every day.

Some of the new major advancements in

the software industry are SAAS. It stands

for Software as a Service. It basically

provides CRM software on the internet with

a subscription fee. Amazon cloud and

Oracle have jumped on the bandwagon and

are in control of SAAS. Technically SAAS can

include even an email server such as

Outlook, SharePoint, or hotmail.

Software industries for the last 20 years

have been fairly growing and havent been

entirely impacted by Wall Street dismal

recession. The Software index based on

196 companies the median debt to equity

ratio is around 62%. Software in general

has advantages over other industries. They

usually have large cash reserves and also

dont usually have to deal with the

inventory problem that many other

industries have to. Another key aspect to

the software companies is that they dont

have much property, plant, and equipment.

Not to mention raw materials like a car

manufacture needs. Most of the expense

themselves are from the maintenance of

the software itself and the programmers

salaries. On top of that, monthly SAAS

software subscription fees can generategood revenue.

Some issues facing the software industry

are the patent laws. Some of the top

software companies are trying to get

congress to fund a 3.26 billion proposal to

help them fight against pricey and

intellectually rights. Technology patents

have not revised since the 50s. Will they

get the money they need? That is hard to

answer.

Some swat analysis of software companies.

There outlook haves some issues. The first


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one is the banks are in fear of lending

money to one another and to their

customers too. Software companies will be

affected by this a little. Consumers might be

able to get cheap PCs and electronics;however on the corporate side the

spending will be cut.

The opportunities for the software sector

are not a positive, but are not dismal either.

According to Gartner Inc they predict

technology spending will not forecast to a

5.8. However it still will be a positive

increase of 2. 3%. The US is expected to be

flat while the EU will be negative numbers.

The weakness is the dollar is losing value.

Last time I checked the index was at around

76. This will hurt many companies that

have revenues in Europe and Asia. VeriSign

and Digital River are just a few of many

companies that rely on the international

market.

What does Porter have to say about all of

this? Yes, now we are going to swing on

over and check out the Porters framework.

According to Data Monitor on the buying

power of the global applications software

they rank it as relatively weak. There

explanations to this because the switching

cost for a number of buyers are high and

because of the retraining of new

applications. I do agree with the case. In

2006 of November when Microsoft vista

was released, I was ready to conquer the

world. So I thought, after putting in the disk

and observing what Microsoft has done to

this thing! I quickly played around with the

new software and noticed my computer

was running slow. Due to the Vista needing

more horsepower, such as more ram, cpu

speed, and the like I was disappointed.

Next we move on to the supplying power.

This is strong overall power for the global

security software. Its hard to find

substitutes. Especially, when Microsoft

produces its own programming code C ++.

Running a smooth continuing IT setup is not

an easy task. You have to have skilled

workers that know how to use the

hardware and fix it when it goes array.

Can new entrants join the arena? The

answer is yes. Software is being learned all

over the world. C++, java, html, and open

source codes are readily available to people

that want to learn. Ownership of

intellectual property is vital for companies

to stay alive and maintain good margins.

However in China that is being tested every

day. License key are being randomlygenerated with high sophisticated program

keygens. You also have piracy software on

the loose. This can kill a company if it gets

leaked out. R&D is an expensive key that

creates differentiated products that can

later be sold for great returns. The

broadband capabilities are reaching

dramatic speeds. A lot of software now can

be purchased online and then directly

downloaded to a computer. The advantage

to this is, one doesnt need to go to the

physical store. This type of software is

helping business manage their companies

and employees too. This is how I got my

Office 2007.


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Substitutes are in the air. Every heard of

Fedora Core or Ubuntu? These are open

source codes. Both operating systems are

completely free to download on the web. I

have Fedora which is a Linux operatingsystem. Its great. Its faster than Vista,

more stable and less buggy. Though they

are some negatives to this. Open source

codes are hard to get started with. You

simply cant just double click something all

the time and make it install. Sometimes

you have to know manually install it by

command prompts or need to do some

steps before installing. Microsoft doesnt

like open source, because they claim that it

can hurt their revenues. But I somewhat

disagree with them there. Open source

code systems are still for geeks that like to

be different and have more level of control

that most average users could care less

about. Most ofthe general public doesnt

know how to use open source that well.

Rivalry is the last objective on Portersframework. Apple, Oracle, and Adobe, and

Microsoft are fighting to exist in this trench

warfare game. Apple and Microsoft have

been at war for a while. Apple has just let

themselves get beat while pouring their

guts and souls to the IPod and I phone.

Microsoft has been starting other things of

their own, such as a game system and

digital music players. Microsoft is still kingfor software but I predict that dominating

80 % in the future could dwindle down to

50% in the future. More and more people

are getting interested in open source and

Apples Tiger operating system is gaining.

In the semiconductors research we have

slight increase in the world wide average

sales. From Feb of 09 to July of 09 we have

an steady increase to about 18 billion in

sales. This is shown in. Exhibit 1

China was giving a stimulus package of over

585 billion dollars, which was put in good

use to boost the communications

infrastructure. Credit is still an issue these

days and the PC manufactures and mobile

headsets make up around 60 % of global

semiconductor consumption according to

Moodys. I think by looking at this graph

one could see that consumer confidence is

edging toward a slight improvement;

however I would say its still too early to

predict more sustained trends of massive

increase for the semiconductor sector.

0

2

4

6

8

10

12

14

16

18

20

Global semiconductor sales

Semiconductor Billings, 3 mo. MA, $ bil

, increase fom Feb 09-to Jul 09 .

Worldwide

Market

Europe

Japan

Americas

Asia Pacific


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Gartner expects different outcomes for

2009 than Moodys. In world wide area

Gartner expects the whole revenues of the

semiconductors to fall as much as 22.4 %.

Though 1

st

quarter PC sales came betterthan expected which has led to the vast

array of new microprocessor. They however

take this as the fact that the inventories had

been run down to far according to Gartner.

On the Internet sale from Moodys shown is

slight increase from last year 4th quarter to 2nd

quarter of 2009 shown in Exhibit 2.

Exhibit 2

With retails sales show a small margin ofincrease from 1st quarter of 09. According to

Computer World numbers of 2008 by Linda

Rosencrance they claim that the internet sales

are suppose to grow by 20-30 billion annually.

So by 2012 we are supposed to see a peak of

around 335 billion dollars. That is a far fetch for

me. Looking at this chart I see internet sales

slowly trying to climb an uphill mountain from

last year. What does this mean to the industry

itself?

My conclusion is to think we are going to seemore competitive prices at the Local Wal-Marts

and Best Buy. First goal is to somehow get the

consumer to spend though. These are scary

dark times for spending. I personally have been

shopping online for about 10 years now! I have

to admit I it fantastic. I can always find the

deals that I want and most local stores really

cant compete. I have to admit that lately my

budget for electronics on the internet has been

skewed by the bad economy and I have learnedto live without the greatest electronics.

Craigslist has also caught my keen interest of

buying used stuff.

On the PC side of the things Gartner has some

positive things to say in 2008 compared to

much of the industry in the IT sector. PCs are

slightly down from 2007 numbers. However

looking at this chart on Exhibit 3 we still see HP

dominating the word wide marketplace withalmost 20%. We are in a recession again like in

2000. PC in the first half were great but when

Christmas time came in Santa didnt bring

many PC home. Fewer sales mean bigger

inventories for the major PC makers. This was a

means of a 27.9 decline of PCs over the year of

2000. Microsoft did issue a warning sign for the

last half of the year of 2000. In Exhibit 3 I was

surprised to see the Taiwan company Acer

being in 3rd

place in the worldwide market. Ihave to say, Gartner numbers are a little off

from my research and would bet that Acer is

the second most dominant player in the world.

30

30.5

31

31.5

32

32.5

33

33.5

34

34.5

E-Commerce Sales ($ Bil) rise slightly from

last year 4th quarter to this year 2nd

quarter


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Exhibit 3

PC sales in the US are maybe not as big as

expected but are going to rise according to

Gartner. Gartner believes that Vista is

going to be a necessary upgrade for the

market. Vista is a beast that needs new and

the latest hardware changes. Many people

are going to have to upgrade to get that.

Windows 7 is also due out this Oct 22. My

conclusion is after testing with the beta

version and after 3 years of disappointment

with Vista, we finally have a polished

Microsoft product that has once again. I

like it and its ready for the masses. I expect

when the rest of society gets to play with It,

PC sales will jump up. Last are the ultra

mini netbooks that are tiny and defying

gravity in all ways. Sure they have atom

Intel processor with small amount of ram,

but they sure do look cool with the 6 inch

display that can be fit inside a womens

purse. In Exhibit 4 we see that Dell is the

number one seller in the states. Dell just

bought Perot System for 3.9 billion dollars.

I have no idea how this will play out in thePC market. My guess is that Dell is looking

for other ways of revenue which leads me

to believe that Dell could be heading for

slight decline.

Exhibit 4 PC sales

My thoughtsfor the PCs future of 2009 are

really hard to actually pinpoint how the

consumer is going to spend their dollar. I

think there are some major innovation on

software side such as SAAS, new operating

systems, and potential legal issues if can besolved. If Windows 7 can be like what

Windows XP did then of course the sales

will fly off the shelves. However, one has to

look at the fact that in America out of 1000

people around 850 already have a PC. I

think the Global market is more suitable in


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China and India where PCs number is not

nearly the same ratio. I got some sector

numbers from OSU university by David

Fergurson that shown in Exhibit 5.

Exhibit 5 of how well the IT industry does

compared to others.

Information technology is blooming all over

the world. Some of the Tiger countries like

Korea and Taiwan have fueled

manufacturing components. China has also

been in the game for semiconductors and

PC manufacturing. Fiber to the premises

has spurred a whole new level of

computing. The information technology

age is going to be fun for the 21st

century

and beyond. Some major things that are

happening are the Internet, Software as a

Service, and server upgrade technology. In

2008 it is estimated that a 6 million

quintillion transistor were manufactured.

To give an idea of what that means is this.

A Zeon quad core has 820 million

transistors. Divide that by 6 million

quintillion and you still have much more

room for transistors to spread. In 2011 it is

also estimated that information and

communications technologies will grow by 4

trillion dollars.

Sector Mkt Cap * Mkt % SIM % Bet

Financials $1,658 20.5% 23.4% 2.9%

Health Care $1,211 14.9% 13.2% -1.8%

Information Technology $1,159 14.3% 9.5% -4.8%

Consumer Discretion $1,090 13.4% 17.9% 4.5%

Industrials $935 11.5% 11.1% -0.5%

Consumer Staple $768 9.5% 9.0% -0.5%

Energy $486 6.0% 6.5% 0.5%Telecom $339 4.2% 4.9% 0.8%

Utilities $231 2.9% 2.9% 0.1%

Materials $230 2.8% 1.6% -1.2%

* As of 12/31/02 (in billions)


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Microsoft (MSFT)

Report Project 2-3Overview of the firm: Microsoft

develops, manufacture, and licenses its own

software for PC market. Microsoft

operating system is the dominant operating

system in the world for PC end user. It has

software that can help with business such

as office 2007 a suite that includes Word,

PowerPoint, and Excel, SharePoint with is

an interactive global calendar for businessto sync data with, and has security

operation system for maintaining admin

control of rights and privileges found by

Server 2003 and 2007. It has contracts with

the military, hospitals, University, and just

about anything else. Being in the Air Force

for about 5 years, I have seen many

Microsoft products in our shop with loads

of inventory. One of the most used

Microsoft products out there for the

military is Office 2003. This has now hasbeen upgraded to Office 2007.

Microsoft has MSN networks for it

internet users. This is a strong search

engine that finds topics when people that

are in need of them. And the newest search

engine is the Bing. Microsoft has the rights

to the Xbox 360 game console. The Zune is

a direct level threat to the IPod. Microsoft

also makes its PC games and has many PC

peripherals too. Major products by

Microsoft include Vista, Xbox 360 game

console, Office 2007, and the latestWindows 7 edition. How is the software

industry doing? From about 2003 to now

we have bumpy road of strength. However

in late 2008 to the present the industry has

been slowly regaining its foothold. If I were

to rub a global ball and predict the 2010

outcomes, I would have to say it really

depends if the US gets out of the recession.

Japan, France, Germany and Hong Kong

have gained a small GDP % increase. How

long will that last? I do expect to see some

moderate increase in sales. If Microsoft

Windows 7 can really make some waves

that Vista could not do then were all in for a

treat or two.

Swot Analysis of Microsoft consists of this.

Its Strengths are they have a flexible diverse

workforce through contingent workers.

They have Multinational Corporation inover 60 different countries. Their software

products have extremely high quality name

recognition such as Word, Excel,

PowerPoint, and Outlook. Those names

are fairly common to even young toddlers

and that are learning to put their little

fingers on the keyboard and use the

applications.

Its weakness they have lost the search

engine battle to Google. They are now

trying to bounce back with the MSN

network and Bing. Windows CE was a

disaster to recover from. The whole

wireless technology got blown from under.


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They have had many delays in its new

operating software launches. Microsoft

Vista at first was not well like by the public.

Many bought the new operating system,

only later to reinstall the old operatingsystem. The drivers were weak. Many of

the drivers with vista didnt work properly

with the device.

Its opportunities are PCs are vastly coming

down in price. What this means to

Microsoft is cheaper PCs, the more people

to use their operating system. If one were

to go to Best Buy and get a new PC, they

will most likely see the operating system of

Microsoft Vista. Unless they were to buy a

Mac computer. The global demand for PC is

increasingly popular around the world.

Its threats on the software side are Mac

and Linux. My experience with Mac is its a

nice OS with easy features, however the

software usually cost twice as much as

Microsoft based OS systems.

In the mid 1990s companies such as Sun

Microsystems, Netscape, Oracle, IBM, and

AOL took control of the internet potential,

while Microsoft failed to do so.

Products and Competition.

Microsoft has an assortment of PC products

to electronic gadgets. Their most lucrative

product is the Windows operating system.Starting in the 80s and now with Windows

7 they have maintain a stronghold against

Apples OSX operating system. They have

clearly won the operating system battle.

On the gadget side of the consumer world

they have been killed. Apples Iphone and

Ipod haverevolutionary made the perfect

all in one electronic device. Microsoft

spitefully answer to this was the Zune.

However the Zune is barely staying afloat.

Just to show you a chart from 2007.

Exhibit 1


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Other recent activity on the firm. Data from

1-3 found on www.microsoft.com

1. Microsoft Entertainment and Devices

Division has generated for Microsoft 40% of

its yearly segment revenues. This fact was

due to the Express upgrade to Windows

Vista and Microsoft Office. Microsoft

highlights some key aspects for the future

revelations. These include

Consumer Technology- They emphasis the

ability to compete in the software industry

and make sure properly maintains and

support of the software for the current and

future. They are also interested in the

mobile aspect of devices that people want

these days. Examples include the Zune MP3

player which is competed for the top spot

for MP3 players such as IPOD by Apple.

Software Plus services- They want to

combine the power of the desktop and

server software with the reach of the

Internet and connect business together.

They have done this magically well with the

Microsoft Office and SharePoint.

Expanding the presence on the desktop,

the server, and with developers. Through

the ability to deliver additional value in

security, messaging, systems management,

and collaboration, and new technology for

high-performance computing, unified

communications, and business intelligence,

we believe we are well-positioned to build

on our strength with businesses of all sizesand with developers. Fiscal year 2008 saw

widespread adoption of Windows Vista and

the 2007 Microsoft Office system and the

launch of Windows Server 2008, SQL Server

2008, and Visual Studio 2008.

2. Revenue growth was driven primarily by

increased licensing of the 2007 Microsoft

Office system, increased Xbox 360 platform

sales, increased revenue associated with

Windows Server and SQL Server, and

increased licensing of Windows Vista . See

below

Exhibit 2

45000

50000

55000

60000

65000

2008 2007

msft Revenues increase from 50-60

billion in 2007-2008

msft


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3 . Global macroeconomic factors have a

strong correlation to demand for our

software, services, hardware, and online

offerings. In fiscal year 2009, MSFT expects

a broad continuation of the economicconditions and demand experienced during

the latter part of fiscal year 2008. In fiscal

year 2009,they expect double digit revenue

growth and estimate PC shipments will

grow between 12% and 14%. Within the

overall PC market, expect current trends to

continue with consumer segment growth

exceeding that of the business segment and

emerging market growth exceeding that of

mature markets.

Exhibit 3

Liquidity issues Microsoft has about 6

billion in borrowing. Rumor has it according

to itmanagement.earthweb.com they mayacquire the firm SAP. Another wild guess

was the money could even be for operating

expenses. For instance, some of the cash

might be used to fund marketing and

advertising forWindows 7, which is due out

this October of 09. according to

InternetNews.com.

SAP is a multinational software

development and consulting corporation

headquartered in Germany and is worth

roughly around 10 Billion in revenue. Steve

Ballmer CEO of Microsoft did not want to

spills out any news about a merger or such

talks.

Conclusion to liquidity it is estimated

Microsoft has around 25 billion in the bank

to play with. With the recent 6 billion indebt they dont have anything to worry

about. They might be buying shares back or

general corporate purposes, which may

include funding for working capital, capital

expenditures, repurchases of stock and

acquisitions. I think the merger for SAP will

be even bigger than the Hotmail, Facebook,

and AQuantive. SAP is the world's largest

business software company. With thatbeing said I hope Steve can get the deal

done and make sure they fly straight with

the EU and not cause any more ruckus in

Europe that they have already been billed

around 1.8 billion Euros in fines.

00

1000

2000

3000

4000

5000

6000

7000

2009 2008 2007 2006

MSFT and AAPL debt-MSFT has

borrowed in 2009 due to a maybea buyout of SAP.

MSFT AAPL
http://www.internetnews.com/software/article.php/3819736/Microsoft+Windows+7+in+Time+for+the+Holidays.htmhttp://www.internetnews.com/software/article.php/3819736/Microsoft+Windows+7+in+Time+for+the+Holidays.htmhttp://www.internetnews.com/software/article.php/3819736/Microsoft+Windows+7+in+Time+for+the+Holidays.htmhttp://www.internetnews.com/http://www.internetnews.com/http://www.internetnews.com/http://www.internetnews.com/software/article.php/3819736/Microsoft+Windows+7+in+Time+for+the+Holidays.htm


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Asset Turnover issues-Microsoft in

2007 has bought AQuantive at 66.50 per

share at a valued rate of 6 billion. On a side

note in that same year they bought about

1.6 percent of the social networking siteFacebook for $240 million which values the

company at $15 billion

On the Merger side, Microsoft has acquired

in April 2008 and completed the acquisition

of Fast Search & Transfer ASA (FAST), an

enterprise search company. MSFT believe

the acquisition will broaden our enterprise

search technology product offerings to

businesses and will enable innovations in

related areas such as our portal and content

management.

Latest news about Microsoft is to pay the

Yahoo up to $1 billion in cash up front for

the deal that should be fully decided by

2010. What the deal involves is yahoo

search engine will be powered by bing in a

10 year deal. A diversified business modelleads Microsoft into record breaking

revenues of 60 billion in 2008. Chris Liddell,

chief financial officer of Microsoft. Our

broad span across geographies, product

categories and customer segments is a

tremendous asset and supports our outlook

for double-digit revenue, operating income

and earnings per share growth for this fiscal

year and also for fiscal year 2009. This wasdue to the fact that electronic devices grew

about 68% by last year. What helped spur

this great increase was the demand for new

Xbox 360 console units?

Conclusion ATO- The billion dollar deals

that Microsoft has made with AQuantive,

Facebook, and Yahoo is just what a big

company can do. What is all of this to

Microsoft? When a company has revenuesof almost 60 billion in 2009 the rules they

play and mergers they take come fast and

easy. They now have yahoo in a major deal

that I think Google could now have

competition. Google for the longest time

has been dominate search engine on the

internet for quite some time and still is the

number 1 search engine. As shown here by

CNN in June of this year poll. Can Bing give

Google a war?

Exhibit 4


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Conclusion continued ATO

What I like about the deal is I have

personally gone to bing site and tested the

results out. It has a nice fresco painting and

is easy to navigate the search queries. They

mostly do Vertical mergers, and now with

the horizontal merger with Yahoo. I think

Microsoft deal just wanted to show they

can compete with Google who some say is

the king of the world in terms of internet

dominance. I would like to say that this

deal with Yahoo is going to put Google in a

hard bind, but I dont know how Google will

react to this in the later years.

What really gained a market opportunity for

revenues was the mere fact that Microsoft

Xbox 360 marked it biggest year in history.

They sold over 28 million units worldwide in

2008. While they competitor Sony had only

sold around 20 million units. They also in

the past years spent about a billion in fine

tuning the Xbox 360 live. This enables gamemembers to play against each other online

from around the world. The 60 price tag for

the 1 year membership in 2008 gave the

number of subscribers to dramatically

increase since its release three years ago.

They were also able to grab a stranglehold

in the European market for Xbox 360 sales.

At $199 per unit system that was increasing

its eye toward victory. While the Sony

Playstation 3 was still selling at around 400-

500 dollars. Another big Santa helper was

when NetFlix jumped on board with the

Xbox live. NetFlix member provides users

with access to unlimited viewing of more

than 12,000 movies and TV shows in DVD

quality as well as many in high definition. I

found this data on Microsoft Pass press.

Exhibit 5

Anti trust (Solvency issues)

MSFT incurred $1.8 billion of legal

charges during the year primarily

related to the European Commission

fine of $1.4 billion (899 million) ascompared with $511 million of legal

charges during the prior year from

Microsoft annual Report of 2008.

0.750.83 0.81

0.640.56

0.82

0.95

1.1

1.2

1

0

0.2

0.4

0.6

0.8

1

1.2

1.4

2009 2008 2007 2006 2005

Asset Turnover -MSFT is catching

Apple due to large sales in

Electronic device system.

MSFT AAPL


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Microsoft has been attempting a full-speed-

ahead resolution of the two antitrust cases

against it by the European Union, one

dealing with the ability of Microsoft Word

and Excel to interact with otherapplications, the other with the installation

ofInternet Explorer in the upcoming

Window over the summer, Bloomberg

reported that Redmond was in talks to wrap

up both investigations by the time

European Competition Commissioner

Neelie Kroes stepped down from office at

the end of 2009. http://www.microsoft-

watch.com

Conclusion- The EU commission is making

the monopoly issue over Microsofts

Internet Explorer (IE) web browsers and

Windows Music player far too harsh then

the reality is. The new version of Windows 7will allow members to disable Internet

Explorer, so it wont be the default Web

Browser. A lot of people I know in fact

dont use (IE). They would rather use

Mozilla Firefox. I only use Internet Explorer

when I have to. It has many bugs and

people have hacked the hell out of it. The

Windows Media player is another issue. Its

basically a novice version of a media playeritself. Jet Audio, VLC, Winamp, and Real

player are better in terms of features and

services they provide.

I dont see an issue on why the EU

commissioner is setting these ridicules

fines. The fines have now added up to

1.7bn in the past four years. I have read

on the subject matter on the issue and havenot found out why the EU commission is

doing this. Kroes the EU competition

commissioner has accused Microsoft of

continuing to abuse its powerful market

position, stifling innovation and damaging

consumers. "Directly and indirectly, this had

negative effects on millions of offices in

companies and governments around the

world. I found that quote at

http://www.guardian.co.uk/business/2008/

feb/27/microsoft.europe.

If you look at the next page below in

Exhibit 6 we see that Microsoft is clearly

winning in net margins over Apple. Apple

is more focused on core products such as

hardware and Microsoft cant keep their

hands to themselves while trying to get into

many different markets. They also compete

with Sony with the video game consoles

wars.

Conclusion to Net Margins If one was

to look at numbers alone on the income
http://www.microsoft-watch.com/content/web_services_browser/microsofts_eu_deal_should_be_scrutinized_insists_opera.htmlhttp://www.microsoft-watch.com/http://www.microsoft-watch.com/http://www.guardian.co.uk/business/2008/feb/27/microsoft.europehttp://www.guardian.co.uk/business/2008/feb/27/microsoft.europehttp://www.guardian.co.uk/business/2008/feb/27/microsoft.europehttp://www.guardian.co.uk/business/2008/feb/27/microsoft.europehttp://www.guardian.co.uk/business/2008/feb/27/microsoft.europehttp://www.microsoft-watch.com/http://www.microsoft-watch.com/http://www.microsoft-watch.com/content/web_services_browser/microsofts_eu_deal_should_be_scrutinized_insists_opera.html


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statements of both Apple and Microsoft we

see that in 2009 the MSFT net income is

roughly around 10 billion more than Apple.

In the revenues we see again that MSFT is

twice as much in sales. What accounts forthis? Microsoft maintains some of the best

gross margins in the industry with the

average in the 80 %. Meaning they grossed

80 cents of every dollar earned from

revenue. Not bad for a company. While

Apple maintained a strong 30% gross

margins which is still good. Microsoft has

great operating margins, great

management team, and a revolutionary

business model. future for Apples sales to

Exhibit 6

.

Here is a picture of Apples iphone

Exhibit 7

Apple is betting a lot on this device.

Final Conclusion With 80 % of Microsoft revenues comingfrom software sales primarily from MS

0

5

10

15

20

25

30

3540

45

2009 2008 2007 2006 2005

Exhibit 6 Net MarginMSFT-vs AAPL from 2005-2009.

Microsft 2x better than Apple at

margins on the average.

MSFT AAPL


15/38


15

office and MS Windows, the future for

Microsoft could need some repackaging. In

2008 due to the global recession itself PC

sales were down around 6%. However I am

with Gartner and they predict worldwide PCsales to increase to about 10.3 % in 2010

due to the recovering markets. What does

this mean for Microsoft? It means

everything for them. Windows 7 is due out

later this year also. It has been beta tested

for quite some time. I personally like it and

think that Windows 7 is going to be one of

those crucial buys for the holidays of 2009

and if it sells well it could very well lead

Microsoft back to its glory days when

Windows XP came out.

On the competition side of things Microsoft

has proved it way to dominate the

operating system wars. OSX has a glossy

eye candy gui, but I still would prefer

Windows over OSX. Although Microsoft is

having antitrust violations in Europe, this

incident shouldnt affect its future. Thanksin Part of China and India which Microsoft is

waiting to cash in on new potential

customers. Apple on the other hand has not

had any litigation problems with its

operating system called Safari, but its not

nearly the beast on the market that

Windows is. In 2005 the cash flow from

operations increased 14 % to 16.61 billion

due to increase in cash receipts fromcustomer driven by 8 % revenue growth

combined with a 12% increase in unearned

revenue. In 2005 they paid out 36.11 cash

dividends compared to 2004 of 1.73 billion

due to an 8 billion in cash used for share

repurchases.

Microsoft debt issues still remain a mystery.

It has never had to borrow in the billions.

Microsofts CFO Liddell in 2008 said they

might have to borrow for the first time to

acquire Yahoo and fund a portion of the44.6 billion dollar deal. That didnt

happened as most people speculated. In

May of this year they filed with the SEC that

issued up to 6 billion in debt. The company

didnt say what was going on with the

money only rumors as I have mentioned

above are all in the air. To reiterate once

again if they could have a merger with SAP

which makes propriety software in Europe

could be a strategic point that Microsoft

could not afford to lose. However CEO Leo

Apothekarstill remained quite on the

subject and did advise a statement that SAP

should be independent for now.

Microsoft is a major player in the IT

software industry. As you can see clearly by

the margins over Apple they are in clear

defiance of gaining its strong foot hold inthe market for computer software. They

have also been able to compete in the Asset

turnover wars with apple as you can see in

the year 2009 at 83 %. I like the position

Microsoft is in with its Business revenue of

Microsoft Office. I use the suite everyday

and have many pals that do the same.

Microsoft long term growth bets. Steve

Baller CEO of MSFT made apparently 8 long

term bets. Online advertising: Microsoft

wants to buy Yahoo to grow its online ad

business. But in response to an analyst

question, Ballmer told Wall Street that even

if the company is thwarted in its takeover


16/38


16

bid, it will continue to invest heavily in its

own online-advertising assets, as the online

services business is typically advertising

funded. I found this and 2 others that could

tell the fortune of Microsoft future. I thinkalso to add in there was the Xbox popularity

over Sony and if Windows 7 can redefined

the glory days that windows XP managed to

do so. If all three of those mentioned

above can gel in a way for the good of

humanity then Microsoft will still be king

of the hill.

Type Public(NASDAQ: MSFT)

Founded Albuquerque, New Mexico(April 4, 1975)[1]

Founder(s)Bill Gates

Paul Allen

Headquarters Redmond, Washington, United States

Area served Worldwide

Key people

Bill Gates(Chairman)

Steve Ballmer(CEO)

Ray Ozzie(CSA)

Craig Mundie(CRSO)

Don Mattrick(Senior VP of Entertainment and Devices)

IndustryComputer software

Consumer electronics

Video game consoles

Products

Microsoft Windows

Microsoft Office

Microsoft Servers

Windows Developer Tools

Microsoft Expression

Business Software

Games[2]

&Xbox 360[3]

Windows Live

[4]

Windows Mobile

Zune[5]

Discount Rate and DCF

Valuation

Project 4
http://en.wikipedia.org/wiki/Types_of_business_entityhttp://en.wikipedia.org/wiki/Public_companyhttp://en.wikipedia.org/wiki/Public_companyhttp://en.wikipedia.org/wiki/NASDAQhttp://en.wikipedia.org/wiki/NASDAQhttp://quotes.nasdaq.com/asp/SummaryQuote.asp?symbol=MSFT&selected=MSFThttp://quotes.nasdaq.com/asp/SummaryQuote.asp?symbol=MSFT&selected=MSFThttp://quotes.nasdaq.com/asp/SummaryQuote.asp?symbol=MSFT&selected=MSFThttp://en.wikipedia.org/wiki/Albuquerque,_New_Mexicohttp://en.wikipedia.org/wiki/New_Mexicohttp://en.wikipedia.org/wiki/New_Mexicohttp://en.wikipedia.org/wiki/New_Mexicohttp://en.wikipedia.org/wiki/Microsoft#cite_note-bbc-timeline-0http://en.wikipedia.org/wiki/Microsoft#cite_note-bbc-timeline-0http://en.wikipedia.org/wiki/Microsoft#cite_note-bbc-timeline-0http://en.wikipedia.org/wiki/Entrepreneurhttp://en.wikipedia.org/wiki/Bill_Gateshttp://en.wikipedia.org/wiki/Bill_Gateshttp://en.wikipedia.org/wiki/Paul_Allenhttp://en.wikipedia.org/wiki/Paul_Allenhttp://en.wikipedia.org/wiki/Redmond,_Washingtonhttp://en.wikipedia.org/wiki/United_Stateshttp://en.wikipedia.org/wiki/United_Stateshttp://en.wikipedia.org/wiki/United_Stateshttp://en.wikipedia.org/wiki/Bill_Gateshttp://en.wikipedia.org/wiki/Bill_Gateshttp://en.wikipedia.org/wiki/Chairmanhttp://en.wikipedia.org/wiki/Chairmanhttp://en.wikipedia.org/wiki/Chairmanhttp://en.wikipedia.org/wiki/Steve_Ballmerhttp://en.wikipedia.org/wiki/Steve_Ballmerhttp://en.wikipedia.org/wiki/CEOhttp://en.wikipedia.org/wiki/CEOhttp://en.wikipedia.org/wiki/CEOhttp://en.wikipedia.org/wiki/Ray_Ozziehttp://en.wikipedia.org/wiki/Ray_Ozziehttp://en.wikipedia.org/wiki/Chief_Software_Architecthttp://en.wikipedia.org/wiki/Chief_Software_Architecthttp://en.wikipedia.org/wiki/Chief_Software_Architecthttp://en.wikipedia.org/wiki/Craig_Mundiehttp://en.wikipedia.org/wiki/Chief_strategy_officerhttp://en.wikipedia.org/wiki/Chief_strategy_officerhttp://en.wikipedia.org/wiki/Chief_strategy_officerhttp://en.wikipedia.org/wiki/Don_Mattrickhttp://en.wikipedia.org/wiki/Don_Mattrickhttp://en.wikipedia.org/wiki/Industryhttp://en.wikipedia.org/wiki/Computer_softwarehttp://en.wikipedia.org/wiki/Computer_softwarehttp://en.wikipedia.org/wiki/Consumer_electronicshttp://en.wikipedia.org/wiki/Consumer_electronicshttp://en.wikipedia.org/wiki/Video_game_consolehttp://en.wikipedia.org/wiki/Video_game_consolehttp://en.wikipedia.org/wiki/Product_%28business%29http://en.wikipedia.org/wiki/Microsoft_Windowshttp://en.wikipedia.org/wiki/Microsoft_Windowshttp://en.wikipedia.org/wiki/Microsoft_Officehttp://en.wikipedia.org/wiki/Microsoft_Officehttp://en.wikipedia.org/wiki/Microsoft_Servershttp://en.wikipedia.org/wiki/Microsoft_Servershttp://en.wikipedia.org/wiki/Microsoft_Visual_Studiohttp://en.wikipedia.org/wiki/Microsoft_Visual_Studiohttp://en.wikipedia.org/wiki/Microsoft_Expression_Studiohttp://en.wikipedia.org/wiki/Microsoft_Expression_Studiohttp://en.wikipedia.org/wiki/Microsoft_Dynamicshttp://en.wikipedia.org/wiki/Microsoft_Dynamicshttp://en.wikipedia.org/wiki/Microsoft_Game_Studioshttp://en.wikipedia.org/wiki/Microsoft_Game_Studioshttp://en.wikipedia.org/wiki/Microsoft_Game_Studioshttp://en.wikipedia.org/wiki/Xbox_360http://en.wikipedia.org/wiki/Xbox_360http://en.wikipedia.org/wiki/Xbox_360http://en.wikipedia.org/wiki/Xbox_360http://en.wikipedia.org/wiki/Windows_Livehttp://en.wikipedia.org/wiki/Windows_Livehttp://en.wikipedia.org/wiki/Windows_Livehttp://en.wikipedia.org/wiki/Windows_Mobilehttp://en.wikipedia.org/wiki/Windows_Mobilehttp://en.wikipedia.org/wiki/Zunehttp://en.wikipedia.org/wiki/Zunehttp://en.wikipedia.org/wiki/Zunehttp://en.wikipedia.org/wiki/File:Microsoft_wordmark.svghttp://en.wikipedia.org/wiki/File:Microsoft_wordmark.svghttp://en.wikipedia.org/wiki/Zunehttp://en.wikipedia.org/wiki/Zunehttp://en.wikipedia.org/wiki/Windows_Mobilehttp://en.wikipedia.org/wiki/Windows_Livehttp://en.wikipedia.org/wiki/Windows_Livehttp://en.wikipedia.org/wiki/Xbox_360http://en.wikipedia.org/wiki/Xbox_360http://en.wikipedia.org/wiki/Microsoft_Game_Studioshttp://en.wikipedia.org/wiki/Microsoft_Game_Studioshttp://en.wikipedia.org/wiki/Microsoft_Dynamicshttp://en.wikipedia.org/wiki/Microsoft_Expression_Studiohttp://en.wikipedia.org/wiki/Microsoft_Visual_Studiohttp://en.wikipedia.org/wiki/Microsoft_Servershttp://en.wikipedia.org/wiki/Microsoft_Officehttp://en.wikipedia.org/wiki/Microsoft_Windowshttp://en.wikipedia.org/wiki/Product_%28business%29http://en.wikipedia.org/wiki/Video_game_consolehttp://en.wikipedia.org/wiki/Consumer_electronicshttp://en.wikipedia.org/wiki/Computer_softwarehttp://en.wikipedia.org/wiki/Industryhttp://en.wikipedia.org/wiki/Don_Mattrickhttp://en.wikipedia.org/wiki/Chief_strategy_officerhttp://en.wikipedia.org/wiki/Craig_Mundiehttp://en.wikipedia.org/wiki/Chief_Software_Architecthttp://en.wikipedia.org/wiki/Ray_Ozziehttp://en.wikipedia.org/wiki/CEOhttp://en.wikipedia.org/wiki/Steve_Ballmerhttp://en.wikipedia.org/wiki/Chairmanhttp://en.wikipedia.org/wiki/Bill_Gateshttp://en.wikipedia.org/wiki/United_Stateshttp://en.wikipedia.org/wiki/Redmond,_Washingtonhttp://en.wikipedia.org/wiki/Paul_Allenhttp://en.wikipedia.org/wiki/Bill_Gateshttp://en.wikipedia.org/wiki/Entrepreneurhttp://en.wikipedia.org/wiki/Microsoft#cite_note-bbc-timeline-0http://en.wikipedia.org/wiki/New_Mexicohttp://en.wikipedia.org/wiki/Albuquerque,_New_Mexicohttp://quotes.nasdaq.com/asp/SummaryQuote.asp?symbol=MSFT&selected=MSFThttp://en.wikipedia.org/wiki/NASDAQhttp://en.wikipedia.org/wiki/Public_companyhttp://en.wikipedia.org/wiki/Types_of_business_entity


17/38

William Raymond Project 5A and 5B FINC 4331 Ronald Sweet Dec 1, 09

17

Capital Asset Pricing Model (CAPM)

In 1964 William Sharpe published the

Capital Asset Pricing Model. CAPM breaks

the portfolio risk into systematic and

specific risk. Systematic risk also knows as

non diversifiable risk is the risk of holding

the market portfolio. They also affect a

large number of assets. Specific risk

involves is when a unique to an single asset.

specific risk can be diversified while

systematic cannot. However systematic risk

can be measure using beta. CAPM formula

that we will be using is

Ke= Risk + Beta (Market Risk Premium)

The risk free (RF) is pegged to the 10 year

treasury.

The beta is a company specific risk. If the

number is positive it general follows with

the market. While a negative beta shows

that it inversely follows this trend. A zero

would indicate that the price is not

correlated with the market. The beta in

effect equals one. If a company has a beta

of lets say 2 than it is two times more risky

than the overall market.

The KE is the required rate of return.

The RM inside of the market risk premium is

the expected return of the overall stock

market.

The RF inside of the market risk premium is

again tied the US government treasure

bond of ten year. According to our teacher

in finance Ron Sweet, has his own theory

about the risk free rate and the market riskpremium. I have looked historical at the

date for the 10 year treasury. I went to

yahoo finance and downloaded the data

from 1962 and calculated the median. The

open yield average out to be 6.5. Again

according to Sweet theory the treasury

doesnt usually fall below 3.5. So we will

use an adjusted to 4.5%.

Sweet theory suggest this

10 yr treasury = 4.-4.5 %

Inflation = 2-2.5%

Real rate = 2-2.5 %

Our teaching has also noted in class that the

market risk premium is in the air for

speculation. In addition he has given us a

investment insights from Barclays global

investors. They have listed on the

conclusion that the equity risk premium is

around 3.25% and in condition of 2002 they

have it pegged around 2.5%. They do

forecast of market return of 7.5% over the

next ten years. We will be using a steady

3.5%. for our equity risk premium.


18/38


18

The beta number is also highly controversial

and our teacher doesnt like the beta

numbers that Yahoo and other sources give.

You can also find many articles if you were

to type in Beta is Dead on Google.

Beta in effect will be figured out like this.

For beta I will be using the following.

Risk Free rate (adjusted) = 4.5%

equity risk premium = 3.5

(Historical Barclays conclusion to above)

My beta median for Microsoft (MSFT) =1.1

IF we do the math we get Ke =8.35%

required rate of return.

Ke (Base) = Rf+ * (Rm Rf)

= .045 + 1.1 (.035)

= .0835

= 8.35 %

Historically the trend with the stocks beta

has been around the .7 to 1.1 range. Every

industry can be different. Usually Tech firms

such as MSFT, AAPL, and GOOG have more

higher on the beta side due to nature of the

environment. GOOG right now range is

selling anywhere between 551 and 557dollars.

The next page shows a graph showing the 3

year rolling beta median for Microsoft.

Beta is defined infinance, the beta() of astock

orportfoliois a number describing the relation

of its returns with that of thefinancial market

as a whole. This is from Wikipedia.

Stock analyst use beta to measure the risk

of a stock. Higher the number the higher

the risk. It has a substantial risk rate that is

accordance to the market.

How do we measure systematic

risk? We use the beta coefficient to

measure systematic risk

What does beta tell us?

A beta of 1 implies the assethas the same systematic risk

as the overall market

A beta < 1 implies the assethas less systematic risk than

the overall market

A beta > 1 implies the assethas more systematic risk

than the overall market
http://en.wikipedia.org/wiki/Financehttp://en.wikipedia.org/wiki/Financehttp://en.wikipedia.org/wiki/Financehttp://en.wikipedia.org/wiki/Stockhttp://en.wikipedia.org/wiki/Stockhttp://en.wikipedia.org/wiki/Stockhttp://en.wikipedia.org/wiki/Portfolio_%28finance%29http://en.wikipedia.org/wiki/Portfolio_%28finance%29http://en.wikipedia.org/wiki/Portfolio_%28finance%29http://en.wikipedia.org/wiki/Financial_markethttp://en.wikipedia.org/wiki/Financial_markethttp://en.wikipedia.org/wiki/Financial_markethttp://en.wikipedia.org/wiki/Financial_markethttp://en.wikipedia.org/wiki/Portfolio_%28finance%29http://en.wikipedia.org/wiki/Stockhttp://en.wikipedia.org/wiki/Finance


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19

To further extend the CAPM analysis I will

also include the high and low Ke. This will

bring forth the other Ke possibilities.

Ke (High) = Rf+ * (Rm Rf)

= .045 + 1.3 *.035=.0905

= 9.05%

Ke (Low) = Rf+ * (Rm Rf)

= .045 + 1 *.035=.08

=8%

I will be using three models to my valuations

Capitalized Earnings Constant Growth Dividend

Model

H- Model

Exhibit 1

Growth Rates.

We will have to figure out Long term and the US

economy growth.

Here is a chart From Barclays showing the Labor

for growth and the average production growth.

They have assembled the numbers of average

labor force as 1.7 % from the year 1960-2001.On the productivity side they have it at 1.9%,

3 year

beta,

0.74

3 year

median,

1.10

-

0.20

0.40

0.60

0.80

1.00

1.20

1.40

MSFT Beta from 1994 to 2009 and 3

year rolling median at 1.10


20/38


20

Exhibit 2

In each of our case according to our teacher

Ron Sweet we will assume long term

growth to be as followed.

CPI = 2-2.5 %

Productivity = 1.5-2.5%

Labor growth = 1.5-2.5 %

Capitalized earnings

Capitalized earnings refer to the return of

investments that is expected by the

investor. It more or less the starting point

for the valuation. This method involves

potential future earnings divided by a

capitalization rate. This method is straight

forward to understand however but difficult

to find the actual capitalization rate.

However, our teacher Ron Sweet has

injected some percentages for us.

required rate of (Ke) Of 7-9.5%

growth (G) of 2-2.5%.

We going to assumed that to find the value

of the firm they are paying out all earnings

out.

The formula for capitalized earnings we will

be using is

EPS0 (1+g) / Ke-g

Ke is always greater than g. If not the stock

is considered perpetual.

Here is what we need for Capitalized

earnings. Of Microsoft (MSFT)

Beta range of 1%-1.2%

EPS0 = 1.62 as of 10/23/09 on yahoo

finance

Ke= range of 8% - 9%

Formula to get Ke


21/38


21

.045 +1 *.035= 8%

Growth = 2-2.5%

The results are as follows

BETA 1 1.1 1.2

growth 0.025 0.0225 0.02

EPS1 1.6605 1.65645 1.6524

Ke 0.08 0.0835 0.087

market

$

30.19

$

27.15

$

24.66

current $ -

$

26.00 $ -

After running the numbers using the

different beta, growth and discount rates

we come up a little high than the actual

price. However if we have a higher Ke and

a higher beta our market value comes out

smaller than the actual price. According to

yahoo price of Microsoft (MSFT) was $26 as

of 10/21/09. The 52 week low and high is as

follows.

52 week low and High

Low= 14

High = 29

Exhibit 3

The capitalized earnings have three

different Ke values, growths rates, and beta.

Ke base = 27.15

Ke low = 24.66

Ke high = 30.19

The range of the stock is therefore

concluded that in the capitalized earnings

we can have numbers that are as low as

24.66 to 30.19. That is intolerance of the

low and high of 14-29 dollars.

$-

$5.00

$10.00

$15.00

$20.00

$25.00

$30.00

$35.00

HIGH BASE LOW

MSFT- Capitalized Earnings Model vs the acutual price

of $26

CAPM

RESULTS

CURRENT

STOCKPRICE OF

$26


22/38


22

Constant Growth Model Gordon

DDM

The constant-growth DDM aka Gordon

Growth model, because it was made byMyron J. Gordon assumes that dividends

grow by a specific percentage each year,

and is usually denoted as g, and the

capitalization rate is denoted by k.

While the Gordon growth model is a simple

and powerful approach to valuing equity, its

use is limited to firms that are growing at a

stable rate.

The formula for The Gordon Growth Model

is

Value of Stock = DPS1 / ke-g

DPS1 = Expected Dividends next year

ke= Required rate of return for equity

investors

g = Growth rate in dividends forever

Here we are going to use

Div 0 =.52 according to yahoo on 10/23/09

Beta = 1- 1.2% range

Low Base High

Ke 8% 8% 9%

growth 6% 5.5% 5%

price $ 18.20 $ 19.25 $ 20.41

actual $ 14.87

$

26.23 $ 26.75

52 wk low 52 wk highActual price = 26.23

Exhibit 4

DDM

PRICE

RANGE

OF

$14.76-

$27.56

actual

,

$26.2

3

$-

$5.00

$10.00

$15.00

$20.00

$25.00

$30.00

Low Base High

Gordon Growth Model (DDM) of MSFT

price & actual price of $26


23/38


23

Again here like the capitalized earnings we

also have three different growth rates of 5,

5.5, and 6% However keep that in mind that

will assume that our price will be below the

acutal price $26.

The prices we are left with are this.

Ke base= 19.25

Ke low = 18.20

Ke high = 20.41

Conclusion to DDM model

The dividend discount model, however,

depends on projections about company

growth rate and future capitalization rates

of the remaining cash flows.

I would also like to include that annual

revenues have also shot up from 2005 to2008 to 8% increase. I have some

information fromhttp://www.thediv-

net.com/2009/01/microsoft-msft-dividend-

stock-analysis.html on Microsoft stock

analysis.

They have data from 1999 to 2008.

Microsoft has managed to increase an

11.30% average annual increase in its EPS

since 1999. They have had a low payoutthat has been under 30 % since 1999. That

leaves more room for dividend growth.

Microsoft vs. the Industry Application

Software. As you can see here Microsoft

does exceptionally well in its industry.

Exhibit 5

Source Smith and Barney
http://www.thediv-net.com/2009/01/microsoft-msft-dividend-stock-analysis.htmlhttp://www.thediv-net.com/2009/01/microsoft-msft-dividend-stock-analysis.htmlhttp://www.thediv-net.com/2009/01/microsoft-msft-dividend-stock-analysis.htmlhttp://www.thediv-net.com/2009/01/microsoft-msft-dividend-stock-analysis.htmlhttp://www.thediv-net.com/2009/01/microsoft-msft-dividend-stock-analysis.htmlhttp://www.thediv-net.com/2009/01/microsoft-msft-dividend-stock-analysis.htmlhttp://www.thediv-net.com/2009/01/microsoft-msft-dividend-stock-analysis.htmlhttp://www.thediv-net.com/2009/01/microsoft-msft-dividend-stock-analysis.html


24/38


24

Exhibit 6

Source Smith and Barney

Exhibit 7

Source Smith and Barney( graph made by

me though)

H model

The H model can be broken down into

three separate stages.

The first stagehas to do with a companys

initial stages. The time frame can be

between two and five years. This stage

with go into the initial growth period. Due

to high cost of starting a IT firm up, the

company may have no cash flows and will

therefore be considered a high risk

company that can more than likely fail or if

-20 0 20 40 60

1 yr

3 yr

5yr

YTD

3 month

Average Annual Total Returns-

daily through Oct 23,2009 MSFTvs Industy vs S&P

S&P 500 index industry MSFTSource Smith and Barney


25/38


25

they do pull it off they can sky rocket.

Microsoft was one of the few that blasted

past most peoples perception. The first

stage may have substantial high growth but

then the second stage kicks in gear andbrings the figures growth rate linearly to its

initial stage, until long term growth is

reached.

The last stage with begin to balance it out

according to the market so investors can

get a real sense of more or less of what the

company could be worth.

For our H model we will use the formula

= Div 0 (1+g) +div1 +(gs-gl)/ Ke-g

low base high

Ke 8% 8.5% 9%

Earnings

st 15 25 35

Half life 8% 12% 18%

earnings

LT 6% 6% 5%

prices 19.9732 53.51515 106.561

actual $ 14.87 $ 26.23 $ 26.75

52 wk low 52 wk high

Exhibit 8

Standard and Poor decision on hold.

They give it 3 stars out of 5

Sep-Q EPS of $0.40 vs. $0.48 is $0.08 above

our estimate. Revenues fell 14% to $12.9B,

but were $388M above our forecast, as the

company saw stronger PC demand and

Xbox sales. We believe MSFT benefited

from an inventory build in anticipation of

the launch of Windows 7.We expect the

premium mix to rise as enterprises

gradually adopt Windows 7 over the next

couple of years. Despite an improvement inthe economy, MSFT plans to maintain cost

discipline. We raise our FY 10 (Jun) EPS

estimate $0.14 to $1.67 on

higher revenues and lower expenses, and

our target price by $3 to $30.

J.Yin from S&P

H

modelforcas

t

prices

,

80.05

725

actualstock

price,

$26.2

30

10

20

30

40

50

60

70

80

90

low base high

H model of Microsoft


26/38


26

Final Conclusion

Looking back at the historical price of

Microsoft makes me wander. Before the IT

crash hit Microsoft stocks were hot. In

1999 they had a value of in the 40 dollar

range. Will they achieve that again? I think

it is safe to say yes. If Google can have a 500

and up price range than Microsoft can

surely see an increase of a few more dollars

in its tank. I look at revenues streams that

have also gone up consistently in the past 5

years and from doing the three different

models it was interesting to see the

different prices that Microsoft could attain.

I do like the H model predictions of

someday seeing Microsoft sell in the 100

dollar range. I also think to answer this

question properly you have to look at long

term and short term. In the long term I see

Microsoft gaining more market share in the

internet market. Thanks in part to the

yahoo and Bing merger. The short term

band aid fix on the horrible Vista to

Windows 7 is an improvement that we can

see a rise in short. I have looked at the price

of the stock in a couple of different angles

and I do see this stock as having potential.

However they are up and comers like

Google with its SAS software that is tackling

Microsoft Office Suit. Therefore Im

concluding and in agreement with S&P J Yin

that it is a hold at the current price of $26. I

do see potential earnings for this stock to

shoot past the 30 dollars range and beyond.

Microsoft Project 5

Relative valuation (Part A)

Exhibit 1

Based on the graph above as of October of

this year, Microsoft is about around 15 %

cheap compared to the market.

0

5

10

15

20

25

MSFT vs S&P P/E of Oct of 2009

MSFT S&P


27/38


27

Relative valuation formula

P/E = share price / Earnings per share

The historical P/E of Microsoft has been

higher than the S&P 500. However as of

2008 February the P/E of Microsoft started

to see a 1 to 1 ratio.

The Price earnings ratio (often simply

referred to as the "P/E") shows therelationship between a stock price and its

company's earnings (or profits) per share of

stock.

P/E ratios is sometimes used as a proxy for

investors assessments of the company

ability to generate cash flow into the future.

Microsoft historical P/E levels from

1987 to 2008 are in the range of 8 98.

Currently the situation at Microsoft as of

Oct of this year is trailing a bit lower than

the S&P on P/E. I was able to get data from

around from around 1987 from Microsoft

and S&P of the PE ratios thanks in due part

to my teacher Ron.

This graph on exhibit 2 shows the normal

P/E range from the years of 1987 to 2008

of MSFT median compared to the historical

PE price. As of October of this year

Microsoft P/E ttm is currently at the price of

19.25.

Exhibit 2

0.5

1

1.5

2

2.5

3

12/31/1987

12/31/1990

12/31/1993

12/31/1996

12/31/1999

12/31/2002

12/31/2005

12/31/2008

MSFT historical PE against itshistorical median of 1.5

above the market.

relative msft median


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Microsoft median relative over its median

in the early years of 1987 has been higher

than currently but it has jumped up and

down and when the IT 2001 crash begun to

sink.

Microsoft info

Exhibit 3

Source yahoo finance

Peg Ratios formula is

Peg Ratios show us that a couples things.

First it can show companies expected

growth and second it shows the

relationship between the price of the stock

and growth.

MSFT Peg ratio is as of Nov 13,09 is =1.49

Apple (AAPL Peg is set at 1.47 )

Here is a comparison that shows the

competitors of MSFT faces in terms of P/E,P/S, and Peg ratio.

Exhibit 4

Source yahoo finance

Exhibit 5

1.49

1.47

1.18

1.13

1.33

Microsoft

APPLE

Google

Oracle

industry

Peg ratios Msft vs

competitors and

industry


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Finance companies its a must have and our

teacher Ron wanted us to still include the P/B

number. Forward P/E and Peg ratios are better

at valuation of a company

Exhibit 7

America was once a time when sprawling

factories and manufacturing were in plain

site. Now that tide is turning away. Both

MSFT and AAPL are greater than the

market average of P/B ratio of around 3.

Importantly, each of these companies has

highly successful products and services.

AAPL has its consumer electronics while

MSFT has its dominating operating system

Conclusion to P/B

Therefore based on my relative valuation of

MSFT price of 29.94 as of 11/23/09 I

recommend a hold for right now. I have

based this on a couple of reason. The first

is the MSFT Peg ratio is higher than its

competitors shown in Exhibit 5 and its

industry. Sales are less subject to

accounting manipulation than earnings, so

the price to sales ratio has this benefit over

the better knownprice to earnings ratio.

MSFT ttm P/S is lower than the competitorsbut is higher than the industry. The low P/s

price of 4.63 could mean for MSFT small

increase in margins will significantlyraise

earnings per share.

Technical Analysis (part B)

We were given some information by our

teacher Ron Sweet about Technical

Analysis. I have heard from past from my

friend that mentioned different patterns

and cycles in the world, but clearly had no

idea it was true. The term he told me was

called chart analysis and also watched a

video on it but got frustrated with the exact

details. All I could remember was they

were using past information to predict the

future decision of some sort.

Technical analysis is using information in or

related to stock prices to make buy and sell

decisions.

The efficient-market hypothesis was developed by ProfessorEugene Famaat theUniversity of

Chicago Booth School of Businessas an academic concept of study through his published Ph.D

0

1

2

3

4

5

6

7

MSFT P/B of 6.40 vs

other competitors

of 2009

P/B ratio
http://www.investorglossary.com/price-to-earnings-ratio.htmhttp://www.investorglossary.com/price-to-earnings-ratio.htmhttp://www.investorglossary.com/price-to-earnings-ratio.htmhttp://www.investorglossary.com/raise.htmhttp://www.investorglossary.com/raise.htmhttp://www.investorglossary.com/raise.htmhttp://www.investorglossary.com/earnings-per-share.htmhttp://www.investorglossary.com/earnings-per-share.htmhttp://en.wikipedia.org/wiki/Eugene_Famahttp://en.wikipedia.org/wiki/Eugene_Famahttp://en.wikipedia.org/wiki/Eugene_Famahttp://en.wikipedia.org/wiki/University_of_Chicago_Booth_School_of_Businesshttp://en.wikipedia.org/wiki/University_of_Chicago_Booth_School_of_Businesshttp://en.wikipedia.org/wiki/University_of_Chicago_Booth_School_of_Businesshttp://en.wikipedia.org/wiki/University_of_Chicago_Booth_School_of_Businesshttp://en.wikipedia.org/wiki/University_of_Chicago_Booth_School_of_Businesshttp://en.wikipedia.org/wiki/University_of_Chicago_Booth_School_of_Businesshttp://en.wikipedia.org/wiki/Eugene_Famahttp://www.investorglossary.com/earnings-per-share.htmhttp://www.investorglossary.com/raise.htmhttp://www.investorglossary.com/price-to-earnings-ratio.htm


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There are three fama test.

weak-form efficiency, future prices cannot be predicted by analyzing price from the past.

Eugene didnt agree with this one either.

Semi strong- test of fundamental analysis and technical analysis combined. Can the open useof public information lead to buying and selling decisions that beat the market? Eugene once

again said no way.

Strong-form efficiency all relevant information, including that which is privately held, is reflected in the share

price. Answer to this is we dont know.

Technical analysis is interested in patterns driven by the market over and under reactions to emotions according to

our teacher Ron.

MSFT historical closes prices

Exhibit 8

15

17

19

21

23

25

27

29

12/31/2008 2/28/2009 4/30/2009 6/30/2009 8/31/2009 10/31/2009

MSFT historical Close from 2008-2009 prices and

the 50, 100, and 200 moving day averages

Close 200 MA 100 MA 50MA

Resistance

Su ort level


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This graph is big to show you the detail of moving averages and prices close. In addition I have

labeled the resistance and support levels. There is a breakout price of 24 and 25 at the support

level at the date around 8/31/09.

Moving averages are one of the most popular and easy to use tools available to the technical

analyst. The most commonly used time frames for moving averages are 10, 20, 50, and 200

periods on a daily chart. However we will omit the 10 and 20 and add the 100 day moving

average.

200 MA is not as responsive in as the 50 MA. If you look at the graph above and notice that it

would take you around 10/31/09 to get into the market. Where is if you use n=50MA you begin

to get into the game at 4/30/09. The MSFT at 2/28/09 price indicates it as 15 at a low support.

When it finally reaches past 29 the 200 MA now decides to makes it mind up and shift in a new

direction being up.

According to wiki investthey say, Technical traders will look to the convergence or divergence

of moving averages, known asMACD, with different periods (or values of "N") to indicate

patterns of resistance or support which technical traders believe indicate where a stock price is

likely to move in the future.

Conclusion Technical Analysis price of MSFT.

We begin to move our eyes to the right of the date of 4/30/09. We begin to see the 50 day and

100 day moving average beginning to make forward momentum process. This indicates to usethat we should start to buy on that date alone. MSFT 50 and 100 day moving average begin to

soar from its support level of around 18 and climb up the ladder to 26. Its a fascinating tale of

buying and staying in. There might be a question as weather to sell on 8/31/09 and again in the

later date; however because of the 50 and 100 day is climbing one might not be inclined to do

so.

Project 6 Philosophy in stock portfolio management
http://www.wikinvest.com/wiki/MACDhttp://www.wikinvest.com/wiki/MACDhttp://www.wikinvest.com/wiki/MACDhttp://www.wikinvest.com/wiki/MACD


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Overview- I dont have much experience in buying stock. Much of the information comes from

my stock broker that I meet about once a year. I do have around $1000 in stocks and another

$4000 in bonds. Someday I want the numbers inversely change to $4000 in stocks. I have done

research and with my account at Smith and Barney via Capital One. I have a Legg Mason

aggressive fund. Myphilosophywill be based off of funds objectives by, CFA instituted theory,BUZZLE.COM, GLOBAL VALUE INVESTING, money talk, USAA, and Merril Lynch that are doingthe best job at portfolio management in my opinion.

Philosophy- I believe in accordance with the Legg Mason that common stock that are

experiencing or will experience long term growth exceeding the average rate of earnings

growth of the companies which consist of the S&P 500 index. I have found alternate sources of

wisdom on USAA website about how diversify their portfolio.

Long-term earnings growth Solid, sustainable business models Strong financial statements and a combination of attractive growth prospects and reasonable

valuations

Source USAA

I have the belief that value investing refers to a philosophy or practice of buying stocks that are

fundamentally sound.

Fundamentals by meaning of ,dividends, earnings growth, cash flow, and book value are more

critical than market forces on the stocks price.

On Buzzle.com they list some valuation techniques such as the following.

How do Value Investors find a potential investment?

- price to earnings ratio is in the bottom 10 percentile for its sector

- debt to equity ratio is less than 1

- price to book value ratio is less than 1- PEG value of less than 1

- Stock value is trading at 60-70% of its intrinsic value


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Risk- The CFA institutes assess risk tolerance Risk is often defined as portfolio volatility,or the fluctuation in the value of your assets over time. They also go to mention that your

tolerance for risk is a very personal characteristic that may be difficult to determine and may

change over time. They specifically state age and risk have a strong correlation. One being that

when one is older he/she that makes aggressive funds that fail have less time to make up with

the poor investments, whereas a younger person can make more aggressive deals. However, ifone has enough to fault on such bad deals and has more than one egg in the basket, maybe

which might not be such a bad deal at all. The older one gets also the circumstances and wealth

will probably change.

Selection process- I have insight on useful information found on Global Value Investing.Their criterion that seems somewhat similar to our teacher Ron was perching about.

Four-Step Common Stock Selection Process

1 Search for investment ideas within circle of competence.

2 Evaluate the company using discounted cash flow model.

3 Study the company and its competitors exhaustively.

4 Decide whether to buy with margin of safety, sell or hold.

Source http://www.numeraire.com/fourstep.htm

With these four objectives in mind lets dig the rabbit hole a bit deeper.

1 The search methods are a mechanical filtering and rank ordering of databases. As our teacher

Ron has showed us a good process of elimination of stocks by sector and then by if the stocks

were high quality or not. The valuation model is used most often for minority interests in

individual common stocks. The circle of competence is a specific application of the general

principle of differential knowledge.

2 Determine margin of safety. Using margin of safety, one should buy a stock when it is worth

more than its price on the market. Warren Buffet I have heard buys stocks at 50% off thediscount actual price.

Pricing models include the use of technical analysis charts for trend and momentum. We have

done this in our last project and it helped me a lot determine on my company the 50 day

moving average a bit. As our teacher is in agreement to this we were not allowed to use

yahoos beta coefficient for our companies. We had to figure that out for ourselves. Also


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beware of hybrid models that incorporate both valuation and pricing such as the use ofbeta

coefficients or so-called volatilities.

3 Study the company, its competitors, and its industry exhaustively if the margin of safety is

sufficiently compelling to justify further interest. This was apparent throughout our project. Iwas constantly comparing MSFT with AAPL. I found this very helpful in determining how well

MSFT was doing compared to its competitors and industry.

4 Time to choose whether or not there is sufficient safety margin to execute a market order to

open a long position to buy the stock.

Catalysts to consider

I have found some themes off of Merril Lynch web site.

These were included in 08 top internet themes that could create trading opportunities in the

group.

Some of the themes included are

Increasing focus on mobile market initiatives and A bump Online media spending.

These are some macro factors to consider.


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1. Demographic problems are currently concentrated in the developed

nations.

.

2. Public policy refers to global imbalances, managed exchange

rates and inflation. It is widely believed that managed exchange rate

policies cannot be maintained indefinitely and therefore wonderwhether, on a 10-year view, there is a case for favoring

Asian equities over US equities.

3. The key Geopolitical question is the impact of a shift from

East versus West ideological differences to differences in

religious ideologies and the related impact on the peace dividend.

4. By Chindia we refer to the rise of populous economies that

(a) are highly competitive producers of goods and services

and (b) have a large and growing middle class that could be a

meaningful source of global demand. There could be

the rise of a significant middle class should reduce reliance

on the US consumer and is positive for world growth, and

hence global equity returns.

5. The Energy factor addresses the confirmed growth in demand

for energy. The supply of and demand for oil is inelastic in the

short run, and any imbalances between the two will generate

Considerable price volatility. The view that energy

prices could be considerably higher than expected over the

next 10 years with potential negative consequences for equityreturns.

6. It is possible that the Environment factor will become meaningful

over the next 10 years. There might be a significant

increase in costs to business which cannot be passed on to

consumers, hence dampening corporate profits and equity

returns.

7. In a world where it is possible for investors to make misjudgments,the main cause of market volatility is the dynamic

beliefs of investors as they struggle to interpret news. The

shift in the average state of beliefs between optimism (bullish)

and pessimism (bearish) and back generates investment

regimes.

(source from http://www.watsonwyatt.com/asia-

pacific/pubs/perspective/docs/WW_MoneyTalk_06May.pdf)


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Microsoft (MSFT NYSE) Project 1 for Ron Sweet Sep 22 William Raymond

Documents

Microsoft Project1 6ALL