In the past columns, we have looked at the balance sheets of several companies. In this analysis, we will take a look at Microsoft balance sheet. Let us see why Microsoft stock is not going up and is there is any prospect for it to go up significantly.
First, let us look at the top line. The overall revenue went up by about 6.8% compared to 2009 and about 3% compared to 2008. The operating income increased by about 18% compared to 2009. Let us look at division by division on how the growth looks like.
Windows & windows live:
Although the profits in windows & windows live went up by 26% compared to FY2009, the profit edged up only by 1.8% compared to FY2008. While some of this can be attributed to a weak economy, the growth of smart phones and the tablet platform may also be contributing to the slow growth.
Server and Tools:
Server and tools has done pretty well even in a tight economy increasing profits through FY 2009 and FY 2010. This division has contributed close to 5 billion in net income to Microsoft's bottom line.
Microsoft Business Division:
Microsoft business division's growth has been flat through FY 2008, FY 2009 and FY 2010. While some of the flat growth may be attributed to the new version of Office coming out, more likely than not, it is likely that the growth in this division will be in single digits.
Online service division:
Microsoft's online service division has been losing money and the gap has increased widely in FY2010. It lost 2.4 billion in FY2010 from 1.6 billion in FY2009. The increased loss is likely to be persist well into FY2011 and FY2012 as Microsoft/Yahoo partnership comes into play.
Entertainment and Devices Division:
It looks as though this division has finally turned the corner and has become profitable. It has generated 589 million in annual profit. I expect this profit to cross 1 billion in FY2011 with continued market share gains for XBox and also increased sales of the Kinect system for gaming.
Microsoft has an excellent cash position which is bolstered by additional debt. The main concern here is the use of cash. Microsoft has shown in the past that it is not very adept in using cash wisely. Thus the increased dividend is a welcome sign for the shareholders. However, the growth of long term debt is not encouraging as it increases the liabilities and weakens the company's otherwise strong balance sheet.
The main concern with Microsoft is the stagnant top line growth in its primary businesses of Windows and Office. The huge losses suffered by the online services division doesnt help the situation. The bright spot for Microsoft is the Server and Tools business. This is followed by the Entertainment and Devices division finally turning the corner.
Microsoft can increase the attractiveness of the stock to the shareholders by increasing the share re-purchase followed by increased dividend payout. As a top rated company, the payout will eventually get investor interest.