Bill Gates is very wealthy, but his once-booming software company has been in the doldrums since the middle of 2002, when it fell below $35. Microsoft (MSFT) hasn't been able to grow its sales and profits as quickly as it used to. This is the company's main problem.
With a market cap of $242 billion, Microsoft is a big company that will have trouble growing. This doesn't mean, though, that the stock is dead. Microsoft is still a good long-term software company, and it has $34 billion in cash, which is $3.28 per share. This gives the stock a lot of money to work with or buy growth technologies. Microsoft just said that its MSN Internet unit would spend $1.1 billion on research and development in FY07. The Wall Street Journal says that Microsoft is looking into buying a piece of Internet media company Yahoo (YHOO) to compete with Internet advertising giant Google (GOOG).
But with an estimated growth rate of only 12% over the next five years, the company has a lot of work to do. At 16.30 times the estimated EPS for FY07, which is $1.44, the stock is not expensive, but it does not seem to be priced as a growth stock.
Its PEG of 1.51 is not cheap at first glance, but if you take into account the cash of $3.28 per share, the estimated PEG drops to around 1, which is a good price. Also, if Microsoft can grow faster than the estimated 12%, the PEG would go down even more.
At the price it is now, Microsoft is worth taking a look at. If you want to play the stock but don't want to pay $2,347 for a block of 100 shares, you might want to look into long-term options, which are also called LEAPS. For example, in-the-money January 2008 $22.50 Microsoft Call LEAPS that don't expire until January 18, 2008, cost $380 per contract right now (100 shares).
This means you risk a total of $380 to have a chance to make money if 100 shares of Microsoft go up in value over the next 20 months. The price at which you break even is $26.30. If Microsoft goes above $26.30, your LEAPS would start to make you money. If Microsoft does nothing, on the other hand, you could lose up to $380 on the initial option play.
Caution: The above example is just meant to show what not to do, not to be taken as a real option strategy. Due to the higher risk that comes with options, I suggest you talk to a professional investor before you decide to use any strategy that involves options.
