Many analysts over the past few months have predicted a bullish run for Microsoft (MSFT), and the stock is now up 26.9% in the last six months. In the past decade, however, the stock has been a roller coaster ride and shares have been relatively flat over this time. Now it's time to determine if Microsoft shares will revert back to their usual $25 to $30 range, or if shares will break into the $40 area as Microsoft can potentially enter a new golden age.
Microsoft has a very simple business structure for a company with a $260 billion market cap. Its cash cows are Windows and Office and its growth is expected to come from its investment in the cloud, Skype, which was bought at a bargain, and its search engine Bing, as it continues to develop. Microsoft has a few other business segments including its gaming division and business services, which may also add significant value to Microsoft in the future. The company continues to try to implement Windows Phone, but I believe that this segment will eventually fizzle out and should have very little affect on Microsoft's stock price.
Despite Microsoft's recent bull run, it still appears to be a good value buy. Microsoft has a one year forward P/E ratio of 10.85 and is expected to still have double-digit EPS growth in the next couple of years. In addition, Microsoft appears to have about $40 billion after netting out its $11.9 billion in total debt from its $59.3 billion in cash and investments and leaving some cash for operating activities. After taking this out of Microsoft's market cap, the company has an incredibly low 9.20 forward P/E.
Microsoft's stock pricing and business structure looks a lot like Apple (AAPL) a year ago. The company has a handful of cash cow products along with some products with tons of growth potential. The company's huge market cap makes it appear like a bubble stock at first, but when looking at the strong financials and future potential to increase revenue and earnings, it becomes an apparent value stock.
There is still some time to hop on the Microsoft bandwagon. I believe that Microsoft shares can be worth $37.50 within the next year, which would be a 19.8% return for investors.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.