Many have commented on Microsoft’s pending Windows collapse based on Gartner analysts Mike Silver and Neil MacDonald’s recent comments. Some of discussed how, by extention, this sets Google up to win over the long-term.
I know both Mike and Neil, and I think think that they are astute, fair-minded and customer focused. I think their specific comments — Windows’ viability in the enterprise long-term given Windows Vista’s challenges — are reasonable.
I think that whoever’s taking those comments and extending them to a death sentence of Microsoft broadly are blowing things way out of proportion.
I actually think that Microsoft is probably a strong medium- to long-term tech buys at this point in time. (Note: Though I have a small stake in MSFT at this time, I am not planning to trade in or out of the stock in the medium term.)
My hypothesis is relatively straightforward.
First, I do a heads-up comparison MSFT against Google on key financial metrics. Here are several I chose:
|Net Inc. (2007FY)||14.0B$||4.2B$|
|CFLO from operating||17.7B$||5.7B$|
Source: Google Finance
I think these growth numbers are staggering — for both companies. Both companies are growing like gangbusters. Google trounced the online market and delivered heart-thumping growth for a company it’s size. Still, MSFT can feel proud in that it actually grew earning more than GOOG in 2007 on an absolute numbers basis. (Check the math.)
Still when you stack up both sets of numbers and you put an investor’s perspective against them, I start thinking MSFT looks far more attractive. To me this distinction–the investor’s perspective–is vital. To an investor, absolute growth (where GOOG has the edge) is important, but not decisive. Rather, to an investor, what one should look for is consistently better growth versus expectations. Beating expected growth (and a consistently high dividend yield) over time is the best way to grow shareholder value over the long-term.
Expectations are made clear in the PE number, where GOOG is literally more than double MSFT’s. While I do buy that GOOG’s growth prospects on a growth rate trajectory are strong over the next 5 years, it’s hard to believe that it’s worth 2x a PE of MSFT over that period.
MSFT is a big company, and it may be lumbering at times. I think though that reports of its death are greatly exaggerated. It is still a profit juggernaut. It throws off oceans of free cash flow, which it can use to invest. It does still attract and retain amazing engineers who want to ship things that will show up on millions/billions of devices or PCs. Many have left, but many haven’t. And it is a company that doesn’t know how to quit.
It also has two undiscussed “aces” up its sleeve that I think are not yet factored into the PE difference that I see.
First, MSFT has been a big company longer and has gone through many (not all) of the growing pains of being a big company with more than 50K people. It knows how to execute pretty well with it’s 80K people.
By contrast, GOOG has just hit 20K+ people and is growing liek gangbusters. No matter how smart (and I know they are really really smart) they are, at some point there are too many people at any company, and there is the dreaded feeling of overhead. Great engineers bolt; too many people want to see powerpoints with pretty designs and good punctuation; and decision-making will start to take longer.
This is a law of physics, in my view, where over about 30K people, innovation starts slowing until management processes catch-up. This is particularly hard at technical companies as engineers tend to scoff at management types as Dilberts who just screw things up and put processes in place. But guess what happens if you let 30K people run around and just be engineers who have fun and no one puts a plan in place? I’ll tell you what you get. You lose the ability to ship great stuff. You get too many cooks in the kitchen. You get products that don’t meet their full potential (Vista’s a decent example).
This will hit GOOG (no offense), as it hits any company to some degree. It may mitigate this somewhat, but it will have an impact. The recent HuddleChat / AppEngine fiasco was a good lightweight example–looked to me like amateur hour over there at GOOG. These types of things will happen again. It’s unclear how well they’ll deal with this, but MSFT has had more runway with this problem. My Vista crack aside, the sales force at MSFT is cranking these days, as are numerous product groups (like Server and Tools).
The second ace up the sleeve is starting to be more recognizeable: Ray Ozzie. He is clearly stepping into about the biggest shoes one could ever fill in teh technology world, namely Bill Gates’. His Live Mesh strategy is ground-breaking. He is as visionary and web-centric a technical leader as there is on the planet. If you watch and listen to him speak–without all the ABM bias–I think you’ll see a man who truly ‘gets it.’ He’s someone who sees the enormous power of the web, connectivity, devices, and so on to deliver amazing experiences. His impact and influence appear to be rising–this bodes well for MSFT over the next 5-10 years.
So that’s my case. I find the lower PE and cheaper MSFT a better value to buy for medium- to long-term equity buyers. If you want pure growth, go Google, if you want a better investment, go MSFT.