MSFT - Microsoft

Once a while, I make an exception to discuss an elephant stock in my leopard portfolio.

I am not a big fan of MSFT products. Browser I use FireFox, Search I use google, investment research I use Yahoo. MSFT don't have user-friendly or innovative products but they are diligent follower with great judgement - though never invented boat, they remarkably don't miss the boat . Here are the examples:

1. GUI - Apple brought GUI to PC first(Lisa), MSFT copied it to Windows1.0/2.0, and later evolved to a flagship product line.

2. Server - Late 80's, Unix was growing fast, its concept in networking, multi-threading, was thought to be the future of the industry. MSFT rolled out low-priced Windows NT 3.5, and Unix brotherhoods were defeated (Sun, IBM, NCR, DEC, etc).

3. Browser - Revolutionary product - Netscape (originated from Mosaic) was defeated by a pre-bundled Internet Explorer.

This list could go on, but my point is - MSFT is an experienced fighter and magic survivor. They don't necessarily have the best product, but very competitive.

Get back to the fundamental, its income are contributed by 3 product lines - Client (i.e. windows XP), Server (i.e.Win/SQL/Exchange Server), and Office. Income growth rate of both Client and office are at 3-5%, and server at 10-15%. Not surprisingly, almost all other products lose money - including Business solutions, MSN, Mobile, Entertainment (X360).

Given its Vista and Office 12 release schedule in next 12 months, MSFT's income from 3 major product lines are quite safe with potential higher growth. In the meantime, many money losing business are narrowing the gap. Better yet, with 11% decline on Friday, and closed at $24.15, its P/E < 20, EV/EBITDA < 12.

Risk:
1. Could google's web-based office application, Linux etc threat Microsoft - and ultimately brings damage to its bottom line? Certainly possible, but low-probability risk in 2-3 year time frame.

2. Another concern is its 60,000 employees - a large troop and recruiting more. On plus side, (just my observation): their recruiting process works fine, at least hired a few friends of mine - very talented individuals in the past few years - (if you're reading it, yes, I am referring to everyone of you!).

In my opinion, this stock, right now, is ideal for conservative investors who look for 8% - 12% annual return with less volatility in the next 18 - 24 months. Though I won't add into my blog portfolio, as it doesn't fit leopard criteria.