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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.htm8/2/2019 Microsoft Project1 6ALL
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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.html8/2/2019 Microsoft Project1 6ALL
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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
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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
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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_entity8/2/2019 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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.
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William Raymond Project 5A and 5B FINC 4331 Ronald Sweet Dec 1, 09
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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/Finance8/2/2019 Microsoft Project1 6ALL
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William Raymond Project 5A and 5B FINC 4331 Ronald Sweet Dec 1, 09
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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
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William Raymond Project 5A and 5B FINC 4331 Ronald Sweet Dec 1, 09
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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
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William Raymond Project 5A and 5B FINC 4331 Ronald Sweet Dec 1, 09
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.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
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William Raymond Project 5A and 5B FINC 4331 Ronald Sweet Dec 1, 09
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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
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William Raymond Project 5A and 5B FINC 4331 Ronald Sweet Dec 1, 09
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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.html8/2/2019 Microsoft Project1 6ALL
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William Raymond Project 5A and 5B FINC 4331 Ronald Sweet Dec 1, 09
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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
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William Raymond Project 5A and 5B FINC 4331 Ronald Sweet Dec 1, 09
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
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William Raymond Project 5A and 5B FINC 4331 Ronald Sweet Dec 1, 09
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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
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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
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.htm8/2/2019 Microsoft Project1 6ALL
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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/MACD8/2/2019 Microsoft Project1 6ALL
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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
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