MICROSOFT CORP. $51

MICROSOFT CORP. $51 (Nasdaq symbol MSFT; Aggressive Growth Portfolio, Manufacturing & Industry sector; Shares outstanding: 7.9 billion; Market cap: $402.9 billion; Price-to-sales ratio: 4.6; Dividend yield: 2.8%; TSINetwork Rating: Above Average; www.microsoft.com) is the world’s largest software company. Its Windows operating system powers about 90% of the world’s personal computers. Microsoft’s other main product— its Office suite, which includes a word processor (Word) and spreadsheet program (Excel)— controls 90% of its market. The company also makes computer-hardware products, including its Xbox video game console and Surface tablet computer. High U.S. dollar dampens results The company’s revenue rose 33.8%, from $69.9 billion in 2011 to $93.6 billion in 2015 (fiscal years end June 30). However, revenue will likely dip to $92 billion in 2016. That’s because the higher U.S. dollar hurts the contribution of its overseas operations, which supply just over half of overall revenue. Earnings rose from $23.15 billion in 2011 to $23.17 billion in 2012. Due to fewer shares outstanding, pershare profits gained 1.1%, from $2.69 to $2.72. Earnings then fell to $22.5 billion (or $2.65 a share) in 2013 and slipped to $21.9 billion in 2015, but per-share earnings remained unchanged at $2.65. In response to slowing sales of personal computers, as more people use mobile devices to connect to the Internet, Microsoft is aggressively expanding its cloud computing services. For example, the company began selling its Office software as a cloud-based subscription service in 2011 (called Office 365) instead of a one-time purchase. As of March 31, 2016, over 22.2 million consumers now subscribe to this service, up 79.0% from 12.4 million a year earlier. Business subscribers jumped 57%. Microsoft also continues to see strong demand for its Azure service, which helps businesses set up their websites and databases. Azure revenue soared 120% in the latest quarter from a year earlier. Cloud revenue rises nearly 60% In all, cloud services now generate $10 billion in annual revenue, up 58.7% from $6.3 billion a year ago. To support these new services, Microsoft spends a high 15% of its revenue on research. The company’s strong balance sheet will let it keep investing in new projects. As of March 31, 2016, it held cash of $105.6 billion, or $13.41 a share. Its long-term debt of $40.9 billion is a low 10% of its market cap. Microsoft is also using its strong cash balance to buyback its shares. In the nine months ended March 31, 2016, it repurchased $12.3 billion of its stock. It still has $10.7 billion remaining under its current buyback authorization. Hardware spinoff would boost stock The stock trades at 19.0 times the $2.68 a share that the company should earn in fiscal 2016. That’s a reasonable multiple in light of its fast-growing cloud business. In addition, Microsoft could unlock some its value by selling or spinning off its less-profitable hardware business. The $1.44 dividend yields 2.8%. Microsoft is a buy.