In the next series, we move from potato chips to silicon chips, or at least the software that makes them necessary. We’re looking at Microsoft today.
Microsoft Corporation (NasdaqGS: MSFT)
You won’t find many people in the world who haven’t heard of the Microsoft Corporation. Its founder, Bill Gates, began his company in 1975 in Albuquerque, New Mexico. Three years later he opened his first international office in Japan. It’s been nothing but one success after another for Mr. Gates, thanks to good business sense and a fertile imagination.
The Early Windows: DOS to Windows
DOS (Disk Operating System) was what brought Microsoft its first real success. IBM was so impressed that after negotiations with another company failed, it hired Microsoft to provide the operating system for its IBM PC in 1981. Microsoft went from a small business to a major software vendor for the home computer industry. In 1985 the company released the first version of Microsoft Windows, which was originally intended to be a graphical extension for the MS-DOS operating system. Windows was a radical departure from DOS, and was intended to be a user-friendly system that any average person could use without a lot of knowledge about a computer. It’s no wonder that the system caught on with the public.
In the Office
1989 Microsoft Office was introduced, a bundle of office applications such as Word and Excel. Office revolutionized business; and typewriters began to disappear as secretaries and other communicators found how convenient and efficient Word could be. Unlike WordPerfect and Lotus 1-2-3, Word and Excel were user-friendly and relatively easy to master. In 1990 Windows 3.0, with better user interface graphics, was released and sold over a hundred thousand copies in two weeks. Windows was Microsoft’s big revenue generator and eventually became the most favored PC platform. This was soon tweaked to become version 3.1 which went on to become Microsoft first major release for Windows.
From 95 to 360
Continuing to improve Windows, Gates had a hit with Windows 95, selling more than a million copies in the first four days of release. Microsoft branched out into computer networking and the internet, launching MSN (Microsoft Network) in 1995 to compete with AOL. The company collaborated with NBC in 1996 to establish a 24/7 cable news station, MSNBC. Then in 2001 Windows XP was introduced; it had a new graphical user interface and was the most user-friendly system introduced up to that point. That same year saw Xbox make its entry into the multi-billion dollar gaming industry, competing against Sony and Nintendo. Its success spawned Xbox 360, giving Microsoft a healthy share of the gaming market. In 2008, Microsoft further diversified and extended the desktop with Vista, which received much critical acclaim, and a storm of criticism from its established users for poor support. In 2009, Microsoft seems destined to curtail the brand “Vista” with Windows Seven.
In the Doldrums
Microsoft stock has suffered along with everyone else lately but the company’s creativity and innovation practically assure it a long, healthy run as a profitable stock. It would probably be a wise investment, especially since computers are here to stay and Microsoft shows no signs of losing its momentum. There are no competitors for the desktop that can match Microsoft’s scale, diversity, stability and near-universality. Competitive threats, though, are likely to arise ‘in the cloud’ as more and more desktop functions can be run on the Internet: Google is well financed, Yahoo is down but not out, and there are any number of companies on the sidelines with similarly deep pockets that would aim to steal at least part of Microsoft’s market: Sony – entertainment; Sun – business; etc..
Financially, the company has generous profit margins, lots of cash in its warchest, carries almost no debt, and owns some of the best known PC software in the world. Microsoft only started paying dividends in 2003. They’ve increased the dividend in 5 years from 32 cents to 44 cents. Although its dividend rate is low (currently under 2%), its rate of increase is approaching 25%. This would make this a likely short-to-medium term investment.
Would I consider investing in this company? This company’s stock price is still trading at 1998’s price, not taking into account the extra dividends at about US$4.83. If I’d bought at the peak of the boom, I might still be sitting on a loss.
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