Kramer |1
Microsoft
By: Stephanie Kramer
Finance
11/19/2012
Kramer |2
History
Microsoft was created in 1975 by Bill Gates and Paul Allen. It all started when the two
friends were in school and computers were just being introduced. Their school had an
agreement with various corporations which allowed the students to use their computers in order
to help them become more knowledgeable and comfortable with them. Gates and Allen became
very intrigued with them and soon began skipping classes in order write programs and read
computer books (A History of Windows: Highlights from the First 25 Years). Soon thereafter,
the computer company hired the boys to find weaknesses in the computer, but instead of
getting paid for this they were reimbursed with unlimited computer time.
Unfortunately this company went out of business, but an Information Services company
picked Gates and Allen up and asked them to create a payroll system. With these two jobs
under their belt, they began obtaining a wide range of knowledge which would soon lead to
them creating their own software company which would be known as Microsoft.
Microsoft had some rough spots in the beginning, but they were soon worked out.
Microsoft’s first program, called MS-DOS, was sold to IBM which was a huge step for them.
Gates and Allen continued writing software for both business and the public sector. In 1986 the
company went public and by the next year they created the first version of Windows. A few
years later Gates realized how big the internet was becoming and made that his next focus. He
then created a product millions of people use today called the Internet Explorer.
Products
Microsoft has a wide range of products that can serve just about every customer all over
the world. The range stretches from online services to business solutions to operating systems.
Some of the online services include Bing and MSN while some of the business solutions are
Office and Exchange. Those included in the Microsoft Office are Power Point, Word, Access,
Excel, Publisher, and Outlook. Exchange is an e-mail-based communications server for
businesses and uses the Microsoft Office Outlook as its email platform. It allows business to
access their e-mail from anywhere in the world while on the Exchange server. Also, some of
Microsoft’s operating systems include Windows and Windows Live. Windows Live is a set of
services and software products from Microsoft. There are three ways in which Windows Live
services are offered: Windows Essentials applications, web services, and mobile services.
Kramer |3
Microsoft even has products that some people may not realize such as Xbox and Skype.
Therefore, Microsoft markets to a wide variety of people including business professionals,
gamers, college students, and those on the go. There is something for everyone.
Size
Microsoft, MSFT, is a multinational corporation based in Redmond, Washington. It has
grown and developed into a multibillion dollar company and has locations in 113 countries
worldwide (Microsoft Worldwide). Currently, Microsoft has $73.72 billion in global revenue for
the 2012 year. This can be compared to the $69.94 billion from last year.
The company currently has approximately 94,000 employees (Microsoft: Statistics and
Facts). One of their products, Microsoft Office, is the most commonly-used suite of
office/productivity software worldwide. Also, looking at a breakdown of their company from last
year, Microsoft’s Business Division was the company’s best seller bringing in almost $22 billion
in revenue. The second top seller for the company was the Window’s division which brought in
almost $18 billion in revenue.
It is clear to see that the company is doing very well with the last fiscal year of 2011
being their best year yet. They are very forward looking and want to be one step ahead of all
its competitors. Currently, they are very successful and have a lot to look forward to. Also, their
future looks very bright, because they just acquired Skype and are making steps into the
gaming world with their Xbox. The company just introduced a Windows smartphone, so
Microsoft has a lot to look forward to in the future with this product. There are a lot of
advancements they can invent to help make their phones even better and stand out amongst
the competition.
Why I chose Microsoft
I chose Microsoft, because I use this company’s products every day. As a college
student, I am constantly using Microsoft Office, Word, and Power Point. These products help
make my life easier and more efficient, because they help me get things done fast. So, the
reason I chose this company is because I rely so heavily on their products to do everyday
functions and activities.
Kramer |4
SWOT
Strengths: Microsoft is a very powerful brand name that is well known. It also has
diverse products that cover a wide spectrum of customers, ranging anywhere from gamers to
students to professionals. This company is also at the top of the computer software companies
in the world and Windows operating systems have a market share of over 85%.
Weaknesses: Microsoft is a little behind in the search engine and mobile phone area.
Bing is way behind the leading search engine of Google. Microsoft’s Online Services Division
powered by Bing and MSN is the only one of their divisions that consistently loses money,
including $2.6 billion lost over the past 12 months (Microsoft's 5 Biggest Weaknesses). The
company is also behind in the mobile phone market with their Windows Phone Q2 loosing sales
from last year.
Opportunities: This company can take their weaknesses and turn them into great
opportunities. They have the ability to do more research and come out with a cell phone that
can be even better than its competitors such as the iPhone. They also just entered the gaming
world with their Xbox and have a world of opportunities to improve on this and make it even
more technologically advanced.
Threats: Microsoft’s competition is expanding into different markets and taking the lead
in some areas. Piracy is also becoming an issue. Piracy of software’s is a major issue that has
and still threatens the revenue stream of many application developing firms. Also, many people
now have internet on their phone and are starting to rely less on their computers/laptops
therefore taking away from Microsoft’s products and systems.
Social Responsibility
Microsoft’s Citizenship mission is “to serve globally the needs of communities and fulfill
our responsibilities to the public”. They have an annual citizenship report that highlights all of
their generosity and activities in communities throughout the year. Their environmental policy
has resulted in a decline in its overall carbon emissions. They are also very generous in
donating and since 1982 they have donated a total of $6.5 billion to non-governmental
organizations (Microsoft Citizenship: Community Work on a Global Scale). Finally, Microsoft
worked with suppliers in 13 countries to build community technology centers to expand citizens’
access to digital technologies.
Kramer |5
Financial Analysis
Liquidity Ratios:
Microsoft
Apple
2012
2011
2010
2012
2011
2010
Current
2.60
2.60
2.13
1.50
1.61
2.01
Quick
2.57
2.56
2.10
1.48
1.58
1.96
When taking a look at the liquidity ratios between Microsoft and its main competitor,
Apple, it is clear to see that Microsoft’s current and quick ratios are higher than Apple’s
throughout the past three years. Microsoft’s numbers are a whole number greater than Apple’s
in most cases. Therefore, the current ratio indicates that Microsoft current liabilities are covered
by assets which are expected to be converted into cash in the near future. Microsoft also has a
higher quick ratio which means the firm has a greater ability to pay off short-term obligations
without relying on the sale of inventories. Overall, it looks like Microsoft has a foot up on its
main competition when it comes to dealing with liquidity ratios.
Asset Management Ratios:
Inventory Turnover
DSO
Fixed Assets Turnover
Total Assets Turnover
2012
64.84
88.20
0.87
0.61
Microsoft
2011
50.98
91.08
0.93
0.64
2010
84.44
88.78
1.12
0.73
2012
197.86
49.62
2.71
0.89
Apple
2011
139.50
46.30
2.41
0.93
2010
62.06
64.69
1.56
0.87
Asset management ratios describe how effectively each firm can manage their assets.
The inventory turnover ratio is calculated by dividing sales by inventories. It shows how many
times a company's inventory is sold and replaced over a period. Therefore, Apple had a higher
turnover rate for 2012 and 2011 and thus sells and replaces inventory faster than Microsoft.
However, Microsoft had a higher turnover ratio in 2010.
The days sales outstanding ratio calculates the average length of time the firm must
wait after making a sale before it receives cash. From 2010 to 2012, Microsoft has consistently
Kramer |6
had a higher DSO than Apple. In response to this, Microsoft had more receivables than Apple
had over this period.
The fixed assets turnover is the ratio of sales to net fixed assets. It measures how
effectively the firm uses its plant and equipment. This ratio also indicates how effectively and
efficiently a company is using its fixed assets to generate revenues. Even though Microsoft has
a lower turnover ratio, it has very similar net fixed assets to Apple.
Total assets turnover divides sales by total assets and measures the turnover of all the
firm’s assets. Microsoft and Apple have similar turnover ratios with Microsoft being just a little
lower. This is the result of Apple having close sales and total assets while Microsoft has higher
total assets than sales.
Debt Management Ratios:
Total Debt to Total Assets
Times Interest Earned
Microsoft
2012
2011
45.28%
47.49%
4.21
5.70
2010
46.38%
4.00
Apple
2012
2011
32.86%
34.16%
3.97
4.13
2010
36.43%
4.10
When looking at the debt management ratios, it appears Microsoft has a better TIE.
The debt ratio, which compares total debt to total assets, measures the percentage of funds
provided by creditors. If the ratio is less than 0.5, the majority of a company’s assets are
financed through equity or cash. If the ratio is larger than 0.5, the majority of the company’s
assets are financed through debt (Debt). Also, as stated in the liquidity ratios, Microsoft current
liabilities are covered by assets which are expected to be converted into cash in the near future.
Therefore, even though Apple may have a lower debt ratio, Microsoft is still below the 50%
The TIE ratio is determined by dividing earnings before interest and taxes and is a
measure of the firm’s ability to meet its annual interest payments. The larger the time interest
earned, the more capable the company is at paying the interest on its debt. Therefore,
Microsoft is more capable at paying its annual interest payments compared to Apple.
Kramer |7
Profitability Ratios:
Profit Margin
ROA
ROE
2012
23.03%
14.00%
25.58%
2011
33.10%
21.30%
40.55%
2010
30.02%
21.79%
40.63%
2012
26.67%
23.70%
35.30%
2011
23.95%
22.28%
33.83%
2010
21.48%
18.64%
29.32%
When looking at the profitability ratios, Microsoft and Apple have similar ratios, but
Microsoft has a leg up on Apple. Microsoft had a better profit margin in 2010 and 2011 which
measures net income per dollar of sales. Also, a higher profit margin shows that a company has
better control over its costs compared to its competitors. Microsoft also had much better ROE
ratios in 2010 and 2011 than Apple which is good since it measure the rate of return on
common stockholders’ investment. When looking at ROA it is hard to tell which company did
better, because one year Microsoft would do a little better than Apple and the next year it
would switch. And since the ROA indicates how much profit a company generated for each $1
in assets both companies did about the same. All in all, Microsoft had better ratios in 2010 and
2011 compared to its competitor.
Market Value Ratos:
P/E Ratio
M/B Ratio
Microsoft
2012
2011
14.26
9.61
3.65
3.90
2010
12.66
5.14
Apple
2012
2011
12.25
14.09
4.33
4.77
2010
20.51
6.01
The P/E ratio shows how much investors are willing to pay per dollar of profit.
Companies with a higher P/E ratio show strong growth prospects and little risk. Microsoft has a
higher P/E ratio in 2012, but lower in 2010 and 2011. However, it’s also important to look at
how much Apple’s ratio is constantly decreasing from 2010 to 2012 in both the P/E ratio and
M/B ratio. When looking at both of the companies M/B ratio it looks like Apple has higher ratios,
but the ratios are decreasing faster than Microsoft’s. So, even though Apple may have higher
ratios at times, they are also declining faster from year to year than Microsoft.
Kramer |8
Stock Price Analysis
Volume
Microsoft Prive Vs. Volume
120000000
32
100000000
31
80000000
60000000
40000000
30
29
28
Volume
27
MSFT
20000000
26
0
25
When looking at Microsoft’s price vs. volume is it clear to see that Microsoft’s price has a
steady decline while the volume stays relatively stable from September to November. However,
when looking at the graph, there is a relationship between the price and volume. Whenever the
volume went down and then back up again, for example from 10-19-12 to 10-31-12, the price
did the same. Again this stays true on 9-20-12, because when the volume had a sharp increase
going from about 40,000,000 to 100,000,000 the price had an increase as well. Even though
the price increase was not as dramatic, it still increased from the previous days.
When taking a deeper look at the graph, the beginning and ending volume from
September to November is pretty close. The beginning volume on September 4th was
48,556,700 while the ending volume on November 9th was 43,291,200. Even though the
beginning and ending price are relatively close, there were some ups and downs throughout
those few months. From about mid-October to the end of October there was a dip where the
volume went down and then back up again. This also holds true for Microsoft’s price. On
October 16th, Microsoft Xbox Music was introduced on the Xbox 360 which explains why there is
a jump in volume around that time (Xbox Music heads to Xbox 360). Owners of Xbox got to
enjoy this free 30 day trial while owners of Windows 8 and tablet users had to wait until
October 26th which would explain why Microsoft’s volume began to rise again.
Kramer |9
Volume
Microsoft Price Vs. S&P 500
1480
32
1460
31
1440
30
1420
1400
29
28
SNP
1360
27
MSFT
1340
26
1320
25
1380
This graph shows how Microsoft’s stock price compares to the S & P 500’s stock price.
It is evident that the prices of Microsoft’s shares of stock are similar with S & P’s. There were
some fluctuations within the 3 month period, but they were relatively consistent with each
other. However, there were some points where both Microsoft and the S&P were the same. This
happened from about September 13th until September 27th and then again at the end of the
period from November 1st until November 5th.
Also, the S&P 500 was usually higher than Microsoft. It is also important to realize that
the S&P 500 is weighted by market cap and thus gives more importance to larger companies
such as Microsoft. So, changes in Microsoft’s stock will have a great impact on the S&P index.
This would explain why the S&P 500 and Microsoft’s price move together. At almost any point in
the graph there is a relationship between these two which clarifies why Microsoft’s decline in
price on October 23, 2012 leads to the S&P 500 declining as well.
K r a m e r | 10
Overall, Microsoft has done very well as a company. It started out with just two people
having a love for computers and now has over 94,000 employees. It has grown and developed
into a multibillion dollar company and has locations in 113 countries worldwide. Microsoft has so
many diverse products that fit a wide range of people. There are products for college students
like myself as well as those that are business professionals. I personally use Microsoft Word,
Power Point, and Office on a daily basis and could not image not using them.
When looking at the financial side of Microsoft, it is clear to see they would be a good
investment. It is a company that has been around for over 35 years and is not slowing down. It
is constantly introducing new products into different areas and not just sticking with computers.
They have phones, Skype, Xbox, and so many other products that are not related to computers
which makes them a well-rounded company. Microsoft has had a constant increase in revenue
over the past 3 years. It has a better quick and current ratio compared to its top competitor,
Apple, and thus their current liabilities are covered by assets which are expected to be
converted into cash in the near future as well as having the ability to pay off short-term
obligations without relying on the sale of inventories. Microsoft also had much better ROE ratios
in 2010 and 2011 than Apple which is great for investors since it measures the rate of return on
common stockholders’ investment.
Another reason to invest in Microsoft is because it has so many opportunities to advance
even more. They just entered the gaming world with Xbox and have the ability to come up with
new ideas that can outperform the top gaming companies. They also can do more research on
cell phones and come out with a phone that has bigger and better applications than other
competitors. With cell-phones becoming more and more technologically advanced, people are
relying less on their computers and more on their phones. People who are on the go can easily
check their e-mail and go on the internet. Microsoft has realized this and is being proactive.
All in all, this company has been a great success and has proved why it is one of the
leading computer software companies. It is a great company to invest in and the products are a
perfect fit for anyone. Microsoft makes people’s lives more efficient, because they have
products in so many areas. If one is looking to invest in a company, I would strongly suggest
the stable and well known company of Microsoft.
K r a m e r | 11
References
A History of Windows: Highlights from the First 25 Years. Microsoft. Web. 19 November, 2012.
<http://windows.microsoft.com/is-IS/windows/history>
Debt. Laws.com. Web. 19 November, 2012. <http://debt.laws.com/debt-ratio>
Earnings Per Share. 2012 Annual Report. Web. 19 November, 2012. <http://www.microsoft.
com/investor/reports/ar12/financial-review/notes/earnings-per-share/index.html>
Microsoft Citizenship: Community Work on a Global Scale. Triple Pundit. Web. 19 November,
2012. <http://www.triplepundit.com/2012/10/microsoft-citizenship-community-workglobal-scale/>
Microsoft: Statistics and Facts. Statista. Web. 19 November, 2012. <http://www.statista.com/
topics/823/microsoft/>
Microsoft Worldwide. Microsoft Corporation. Web. 19 November, 2012. <http://www.microsoft
.com/worldwide/>
Microsoft's 5 Biggest Weaknesses. Network World. Web. 19 November, 2012. <http://www.
networkworld.com/news/2011/090111-microsoft-weaknesses-250165.html?page=3>
United States Securities And Exchange Commission: Apple. Web. 19 November, 2012.
<http://www.sec.gov/Archives/edgar/data/320193/000119312512444068/d411355d10k
.htm>
Xbox Music heads to Xbox 360. Engadget. Web. 19 November, 2012. <http://www.engadget.
com/2012/10/15/xbox-music-hands-on/>
Yahoo Finance. Yahoo. Web. Sep.-Nov. 2012. <http://finance.yahoo.com/>.