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Microsoft Corp. $27 – Nasdaq symbol MSFT

MICROSOFT CORP. $27 (Nasdaq symbol MSFT; WSSF Rating: Above average) is the world’s largest software company. Its main products are the Windows operating system, which runs roughly 80% of the world’s computers, and the Office suite of business programs.

In the past few years, Microsoft has tried to cut its reliance on software, particularly in the face of free alternatives such as the Linux operating system. In 2001, it launched the first Xbox video game player. Last year, Microsoft started selling an upgraded version called Xbox 360.

Despite strong demand for the new machine, Microsoft is still losing money on each unit. However, the company feels that licensing fees from game makers and revenues from online game players will eventually offset the Xbox’s development and manufacturing costs. The company also hopes to sell Xbox owners other entertainment services, such as music and video downloads.

Microsoft now aims to take advantage of growing consumer demand for portable devices. It recently teamed up with chipmaker Intel Corp. to make a new portable device that is larger than current handheld computers, but smaller than a notebook computer.

Unlike the Xbox, Microsoft is simply supplying software for this new product; consumer electronic companies will assume responsibility for manufacturing. That cuts Microsoft’s risk. However, this device faces strong competition from new mobile phones, which let users send email, play music and access Internet sites.

Microsoft’s stock continues to trade in a narrow range, as demand for its core products levels off. Technical problems have also forced it to delay launching the consumer version of its new Windows Vista operating system, as well as the next version of Office.

The stock now trades at 20.3 times the $1.33 a share it will likely earn in its current fiscal year. That’s reasonable considering Microsoft spends around 15% of its sales of $4.00 a share on research, which it must immediately write off as an expense. But it’s expensive at nearly 7 times sales. The $0.36 dividend yields 1.3%.

Microsoft is a hold.

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