Certainly from historical financial measures, Microsoft is a cash machine and he does illustrate this.
Does anybody remember the release of Office 2007, with its new ribbon interface? Here is a reminder:
Almost everybody that I talk to said that this new interface required many, many painful hours of re-learning to find out where the functional equivalents were in the older pull-down menus from Office XP and before. It is one reason why I still run Office XP today – I find that the ribbon makes it about three times as difficult to remember where the function is that you are looking for and memory retention is significantly worse.
Windows 8 is going to be a similar analogy to the difference between Office 2003 to 2007. It is throwing away a lot of the “intuition” people have built up using the Windows interface, which will result in increased training time to acclimatize to the new operating system.
While the “Windows and Windows Live” division of Microsoft is responsible for about 40% of its profits, the office (business) division is just over 50%. Businesses have very little choice but to keep with office because of the fact that most staff you can hire will already know it (including the ribbon interface). Microsoft did not lose relevant business for the interface change, albeit, I do not think they were doing themselves any favours.
Windows 8 is probably going to be another incarnation of Windows Vista. With the “appletization” of computing being the new wave of software, the operating system is continuing to be less and less relevant. It is why you still have about a quarter of the population still using Windows XP, while Windows Vista users have gone below 1%. Basically people that had Vista went and upgraded to Windows 7 as soon as it was available, while those that have Windows XP machines are keeping them until they purchase new hardware with the newer version of Windows (and I am of that type – using my old and trusty Windows XP notebook that I purchased over 3 years ago).
This is the primary reason why Microsoft-centric hardware vendors like Dell (Nasdaq: DELL) are taking it in the chin.
This upgrade cycle – upgrading your software when you purchase a new computer system – is likely extending from an upgrade every two years to an upgrade every three, four, five or even more. The new features of the upgraded systems are becoming less and less relevant to actually getting work done and as a result, Microsoft’s business metrics should also slow down, albeit still gushing cash.
At a glance, if Microsoft gave out a $6 dividend tomorrow and promised not to blow money on stupid acquisitions (including their own stock, or buying out Yahoo), you still have a company that is generating roughly 15% of its value in cash a year, which is a fairly decent return when compared against the bond market. The remaining risk is how long companies and consumers will put up purchasing licenses of Windows and Office. Even if Windows 8 is a user interface disaster, I still don’t see people migrating from Office for a long time.
I do not see the stock itself, however, becoming a quick “double” or anything radical like that. If anything you will see some P/EV compression as the cash continues rolling into the bank account.