Skip to main content

People love to bash Microsoft. It's too big and stodgy; its Windows operating system always seems to have issues; the company lacks the cool factor of Apple and Google.

But you won't hear any complaints from investors.

Since the start of 2013, shares of the software giant that everyone loves to hate have posted a sizzling total return of 86 per cent, assuming all dividends were reinvested. That's nearly double the total return of the S&P 500 over the same period, also including dividends.

Story continues below advertisement

With earnings season under way, investors are hoping Microsoft's fiscal second-quarter results – to be released after the close of trade on Monday – will give the stock another leg up. The Redmond, Wash., company kicks off a busy week for technology company earnings, with Apple, Facebook and Google following on Tuesday, Wednesday and Thursday, respectively.

For investors such as Anil Tahiliani, portfolio manager with McLean & Partners Wealth Management in Calgary, Microsoft has several things going for it.

Chief among them is a wide economic moat. Products such as Microsoft Office, Windows and Exchange are are "well-entrenched in companies around the world," and business customers are reluctant to switch, he says. Enterprise sales account for about 57 per cent of Microsoft's revenue and are more profitable than consumer sales, he adds.

Cloud-based services are another avenue of growth. By moving away from one-time software sales to a subscription-based model for its core products, the company generates recurring revenue, Mr. Tahiliani says.

Perhaps most important, the departure last February of controversial chief executive Steve Ballmer – under whose leadership Microsoft's share price stagnated – has led to a new spirit of optimism and innovation at the company.

"The new CEO [Satya Nadella] is well-respected within the company and has the vision to leverage existing relationships into new product markets," Mr. Tahiliani says. "He is also focused on improving operating margins through expense reduction and will continue returning cash to shareholders."

Josh Olson, an analyst with Edward Jones, agrees that Mr. Nadella is moving Microsoft in the right direction.

Story continues below advertisement

He has "outlined his vision for a bold and ambitious new era at Microsoft, with a focus on productivity, cloud computing and mobile devices," Mr. Olson said in a recent note. Mr. Nadella's July, 2014, announcement of 18,000 job cuts "is a testament to his commitment to re-shaping Microsoft."

The second-quarter earnings report will provide an update on Mr. Nadella's progress.

For the quarter ended Dec. 31, the company is expected to post adjusted earnings per share of 75 cents (U.S.), down 4 per cent from 78 cents a year earlier, according to analysts surveyed by Bloomberg. Revenue is expected to climb more than 7 per cent to $26.3-billion from $24.5-billion.

However, Microsoft has been known to deliver positive earnings surprises. In six of the past eight quarters, its adjusted earnings have topped estimates, with the stock often rallying on the news.

The company will almost certainly continue to reward shareholders over the long run with regular dividend increases and share buybacks.

Over the past five years, it has raised its dividend at an annualized rate of 17 per cent. While Mr. Olson expects that growth rate to moderate, he still sees the dividend rising at about 12 per cent annually over the next five years, reflecting Microsoft's strong free cash flow generation, solid balance sheet and conservative payout ratio of about 44 per cent of earnings.

Story continues below advertisement

Citing the stock's 2.6-per-cent yield and "attractive" multiple of about 16.5 times estimated earnings, he has a "buy" rating on the shares. Wall Street is generally positive on the company: Of the 47 analysts surveyed by Bloomberg, there are 24 "buys", 19 "holds" and four "sells".

The doubters have been wrong about Microsoft for the past few years, and the company may well prove them wrong again.

"With a refresh of nearly all of its flagship products, we expect Microsoft's core businesses to continue to show solid growth and provide a catalyst for the shares," Mr. Olson said.

"In addition, Microsoft's innovative new offerings and solid positioning in cloud computing show promise of new growth."

Report an error Editorial code of conduct
Tickers mentioned in this story
Unchecking box will stop auto data updates
Due to technical reasons, we have temporarily removed commenting from our articles. We hope to have this fixed soon. Thank you for your patience. If you are looking to give feedback on our new site, please send it along to feedback@globeandmail.com. If you want to write a letter to the editor, please forward to letters@globeandmail.com.

Welcome to The Globe and Mail’s comment community. This is a space where subscribers can engage with each other and Globe staff. Non-subscribers can read and sort comments but will not be able to engage with them in any way. Click here to subscribe.

If you would like to write a letter to the editor, please forward it to letters@globeandmail.com. Readers can also interact with The Globe on Facebook and Twitter .

Welcome to The Globe and Mail’s comment community. This is a space where subscribers can engage with each other and Globe staff. Non-subscribers can read and sort comments but will not be able to engage with them in any way. Click here to subscribe.

If you would like to write a letter to the editor, please forward it to letters@globeandmail.com. Readers can also interact with The Globe on Facebook and Twitter .

Welcome to The Globe and Mail’s comment community. This is a space where subscribers can engage with each other and Globe staff.

We aim to create a safe and valuable space for discussion and debate. That means:

  • Treat others as you wish to be treated
  • Criticize ideas, not people
  • Stay on topic
  • Avoid the use of toxic and offensive language
  • Flag bad behaviour

Comments that violate our community guidelines will be removed.

Read our community guidelines here

Discussion loading ...

Cannabis pro newsletter