Parsing Microsoft’s Massive 42% Gain In 2013

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The Xbox One Is Enormous In Comparison To The PS4

Microsoft, a company that has suffered from a flat stock price since I was in middle school, is in the midst of a surprisingly strong year. A quick scan of its long-term stock chart indicates that the company is trading higher right now than at any time since 2000. It’s up 41.93 percent this year, having risen to $37.91 in mid-day trading this fine Thursday from $26.71 at the close of December 31, 2012. So what’s going on?

It’s not a simple story, but when you piece together a few key moments for the company this year the narrative is almost parsable. We’ve seen a massive Surface charge, a sliding PC market, and declining Windows OEM revenue. On the other hand, strong Office revenue, new billion-dollar businesses, the announcement of an impending CEO change and a re-org have given the company a new wind.

Microsoft’s stock, year to date, chart via Yahoo:

2013-11-14_11h37_54

2013, So Far

What follows is a rolling, chronological list of some of the events that drove Microsoft’s stock price higher and lower this year.

  • January 24, 2013. Microsoft reports fiscal Q2 2013 results: Microsoft’s $21.46 billion in revenue, and earnings per share of $0.76 were mixed compared to the expected $21.6 billion in revenue and earnings per share of $0.75. I called the results middling. Microsoft initially fell in after-hours trading, but managed a mild gain the next day. Windows outperformed expectations.
  • April 8-9, 2013. Microsoft had a phantom rally that lasted a few days. Sample news items from the period: Microsoft announces the one year “death-aversary” of Windows XP, Office 2013; the Lumia 920 becomes the most-used Windows Phone handset; Microsoft announces its coming earnings report’s date. The rally was brief, so we judge it as neutral.
  • April 18, 2013. Microsoft reports fiscal Q3 2013 results: Microsoft essentially met revenue expectations with top line of $24.49 billion against an expected $24.50 billion. EPS bested estimates, totaling $0.72 ahead of GAAP expectations of $0.68. The company rose in after-hours trading.
  • April 18, 2013: Microsoft announces that its CFO, Peter Klein, will depart at the end of fiscal 2013.
  • April 22, 2013: It is revealed that ValueAct Capital has accumulated a $1.9 billion stake in Microsoft. The company’s stock rises to $30.83, breaking the $30 mark for the first time in recent memory. Microsoft is now up 15.42 percent on the year.
  • April 26, 2013: The Seattle Times: “Judge’s ruling favorable to Microsoft in patent battle; no billions for Motorola. [...] Judge Robart set royalty rates that, according to Microsoft, would amount to the company paying about $1.8 million annually to Motorola.” Less expense, and up goes the stock price.
  • April 26, 2013: Part of the above rally is that Microsoft is raising $2.6 billion in debt, to prevent having to draw down foreign cash reserves and incur a large tax bill.
  • April 29, 2013: Continuing the rally that fiscal Q3 started, Microsoft announces that its Azure service had trailing-twelve-months revenue of $1 billion.
  • May 6, 2013: This marks the end of the April 18 rally. Microsoft closes the day at $33.75. During the day, Microsoft leaks that the Xbox One may not require an Internet connection to always function. At $33.75, Microsoft is up 26.36 percent.
  • May 7, 2013. Microsoft closes down, ending the day at $33.31. It will fall until $32.66 over the next two days. After the end of trading on the 7th, Microsoft and Yahoo reveal through a filing that a search deal with a revenue floor has been renewed. The stock settles over the next few trading periods. Naturally, the need to set the floor means that Microsoft’s Bing isn’t performing as it might, and Microsoft has to pay to keep its market share alive.
  • May 10, 2013: Microsoft announces strong Yammer revenue growth for the first time since its acquisition in June 2012. Microsoft begins a rally towards its dividend. I don’t connect the rally to the Yammer news.
  • May 14, 2013: Dividend of $0.23 per share. The Microsoft rally that started on the 10th continues. On this day Microsoft unveils the Windows 8.1 codename, and starts to talk about the future of Windows. It’s an important moment for the company, and its stock price continues to drift higher.
  • May 20-21, 2013: The May 10 rally ends. The next day, Microsoft introduces the Xbox One, which sends Microsoft down for a few more days, before a rebound.
  • June 2013: Microsoft troughs, matching the NASDAQ broadly all the way through developer conference season, until:
  • July 11, 2013: Ahead of its earnings, Microsoft hits go on its massive reorganization. The news comes directly before earnings. On the news, Microsoft bests the NASDAQ until, well, this:
  • July 18, 2013: Microsoft reports its fiscal fourth-quarter earnings. They were quite weak. Microsoft took the now-infamous $900 million Surface inventory writedown and reported an unimpressive $19.9 billion in revenue, and earnings per share of $0.59. Investors had expected revenue of $20.74 billion, and earnings per share of $0.75. Microsoft falls more than $4 per share, erasing much of its past gains. This is likely the lowest morale moment for the company in 2013. However, its stock, even after the carnage, remains up more than 17 percent on the year.
  • August 23, 2013: Steve Ballmer announces that he will depart as Microsoft’s CEO within the next 12 months. Microsoft’s stock skyrockets. I wrote about Ballmer’s final years to their credit. Others were more strident. The Ballmer Bump didn’t last, and things returned to normal.
  • August 29, 2013: Former Microsoft employee Steve Sinofsky lands at Box.
  • August 30, 2013: To dodge a shareholder fight with ValueAct, Microsoft makes a deal. Its stock falls sharply over the next several days.
  • September 2-3, 2013: Microsoft announces that it will purchase Nokia’s handset business. Investors don’t like the move much: “On the news that Microsoft will purchase substantial assets from Nokia, including its handset business and intellectual property, company investors have discarded its stock, sending it down 6 percent in regular trading. At current trade, that decline represents $16.6 billion in market capitalization, a stunning repudiation of the plan by investors.”
  • September 9, 2013: Microsoft announces a Surface event. Its stock, up the day before, rises for a few more days.
  • September 17, 2013: Microsoft recapitalizes its share buyback program, kicking off a few days’ worth of rally that burn off.
  • October 9, 2013: The PC market shrinks far less than expected. Microsoft finds new legs after a slip.
  • October 20-21: The first few rounds of Surface reviews come out. Microsoft slips in the market until:
  • October 24, 2013: “Microsoft Crushes FQ1 Expectations With Revenue of $18.5B, EPS Of $0.62, $400M In Surface Top Line.” Microsoft nails its quarterly earnings, sending its stock price skyrocketing.

We have now reached what I think we can jokingly call the Era of Hokum: Analysts talking about breaking up Microsoft. Pundits, leaks, purported Elop opinions and the like send Microsoft higher as short-term investors pile in, in hopes of a bang. They got one — for now.

We can’t solve chaos theory in this post, and the Efficient Market hypothesis is bullshit — the above is only the Cliff’s Notes of a Russian novel-esque year for Microsoft.

The gist is that after a long holding period, Microsoft is making a successive parade of large moves that are reforming the company. New enterprise products. New business model. New devices. New consumer services. New executive structure. New CEO. It’s what you could have prescribed for a company that was long a market leader, but at the same had watched its preeminence be slowly ground out by more nimble rivals that invented new product categories as it played catch up again and again. Losing, most of the time, as we know.

We can’t leave a post like this without asking the best question: Is Microsoft now overvalued? According to Yahoo Finance (these numbers, I believe, are using a non-diluted share count, so watch out), has a five-year forward PE of 13. That’s fine. But Yahoo also reports that Microsoft’s current PEG ratio is almost two. Put more simply: Microsoft can beat market expectations by growing at truly moderate ranges. But the market expects them not to. Therefore, the recent rally in Microsoft’s stock is somewhat contrary to investor growth expectations. Something has to give.

That said, Microsoft doesn’t feel too richly valued for a company with its cash position, dividend and share repurchase program, and quarterly net income. Whether it has more room to run is something for you to decide.

Top Image Credit: Flickr