MSFT a Growth Company?

Call me crazy (especially after the last post), but I am getting excited by prospects of MSFT over the next 12 months. months. MSFT is not a typical company that would come in my profile as mentioned in the last post, it surely looks a great buy. Lets me list the reasons.

1> New product pipeline. Windows Vista, Office 2007, Exchange 12 and SharePoint 2006
2> $500 million marketing initiative to coincide with product pipeline.
3> X-Box & PSP3
4> Windows Mobile gaining momentum in cell phone sector.

Though new product pipeline along with the marketing campaign will provide most earnings boost, I am optimist about the last two points also. The only leg that I feel is and will remain weak is a their MSN and internet group. lowering of the advertising revenue is not helping either.

1> New product pipeline: The reason why MSFT has moved in the range from 23-28 since ...it feels like eternity... is that they didn't have a new product in the last 3 years. Software business is like auto makers. New product means new features that people crave. This results in upgrades and hence increased sales. Unlike automakers. this sales comes at very low incremental product cost. So that's the icing on the cake. Please note, like auto makers, they still have to make the necessary marketing investment

So, where does the cost go?
As R&D expense over the last three years. WOW!!! It's like MSFT took a write off for it's cost to make sure that earnings are better for next three years. In a way GAAP forces MSFT to do what other companies try to do by bending the rules.


If you are still not convinced. Try to correlate the firm's revenue with product launches. Conversely, you can also look at APPLE product pipeline (Hardware and Software) and the sales and stock price in early to late nineties.

2> Marketing push: Now as a product firm, once a product is ready they have to invest in marketing and they could not have found a better timing for a marketing push. With all the product coming up so close to one other, there will also be lots of cross selling revenue. When you see a MSFT ad for Xbox, you also start thinking about Windows and Office.

Next posts I will be discussed 3&4 and also the buying strategy