Bill Gates is super rich but his when high-flying software program business has been within the doldrums given that mid-2002 right after falling through the $35 level. The trouble with Microsoft (MSFT) may be its failure to grow both its revenues and earnings on the superlative rates the business once enjoyed.
Any organization the size of Microsoft, with a market-cap of $242 billion, will find growth an concern simply because of its size. But this is not to say the stock is dead. Far from it, Microsoft remains a viable long-term computer software organization and is cash rich with $34 billion or $3.28 per share in money. This gives the stock plenty of monetary flexibility to create or acquire growth technologies. Microsoft just announced it would invest $1.1 billion in R&D at its MSN Internet unit inside the FY07. And according towards the Wall Street Journal, Microsoft is exploring the possibility of getting a stake in Internet media company Yahoo (YHOO) to take on Internet advertising behemoth Google (GOOG)
But with an estimated five-year earnings growth rate of a pitiful 12%, the business has its function cut out for it. Trading at 16.30x its estimated FY07 EPS of $1.44, the stock is not costly but appears to be priced not being a growth stock.
Its PEG about the surface of 1.51 isn’t inexpensive, but if you discount within the money of $3.28 per share, the estimated PEG falls to all-around 1,0, a decent valuation. Also, if Microsoft can improve on its estimated 12% growth rate, the PEG would decline further.
The fact is Microsoft on the current price deserves a appear. If you want to play the stock but do not want to shell out the $2,347 for any 100-share block, you may want to take a examine the long-term alternatives, also known as LEAPS. For instance, the in-the-money January 2008 $22.50 Microsoft Call LEAPS not set to expire until January 18, 2008 presently costs $380 a contract (100 shares)
This means you risk a total of $380 for the chance to participate within the possible upside of 100 shares of Microsoft more than the next 20 months. The breakeven price is $26.30. If Microsoft breaks $26.30, you would start to make funds in your LEAPS. Conversely, if Microsoft fails to accomplish anything, your maximum risk is $380 on the initial option play.
Warning: The aforementioned example is for illustrative purposes only and not being construed as an actual option strategy. Due for the higher risk inherent in alternatives, I recommend you speak with an investment professional prior to deciding to employ any strategy involving options.
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