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Microsoft Still a Solid Stock to Buy

Buying pressure and earnings growth drive Mr. Softie forward


The Electronic Entertainment Expo (E3) kicks off tomorrow, and it will be a big day for computer and video games developers like Microsoft (NYSE:MSFT), which is responsible for the Xbox 360, one of the most popular video game consoles of all time. In fact, in the wake of this huge trade fair, there are already rumors that Microsoft will debut a “Smart Glass” streaming app for the Xbox. Can Microsoft’s innovations help it outdo competitors Nintendo and Sony (NYSE:SNE). Read on to find out.

Company Overview

Microsoft has been around since 1975, which is essentially the dawn of computer software. The company started as a basement operation with Paul Allen and Bill Gates selling simple computer programs for the Altair 8800 microcomputer.

Only 10 years later, the company released the first retail version of Microsoft Windows, an Operating System that would ultimately become standard on most home PCs. With the success of Windows as well as Microsoft Office, Microsoft has grown into a tech giant that brings in just under $70 billion in sales annually and has 90,000 employees worldwide.

Industry Breakdown

There are 117 companies in the Application Software industry. Of those, Microsoft is largest in terms of market capitalization. In terms of fundamentals, Microsoft Inc.’s 2.8% dividend yield also stands out by being the second highest, as does its 38.2% return on equity, which is third highest in the industry.

The company’s Price/Earnings to Growth ratio and earnings growth also fall in the upper quartile. However, the company is middle-of-the-road in terms of sales growth (69th) and long-term growth rate (68th).

Microsoft’s main competitors are Apple (NASDAQ:AAPL), Google (NASDAQ:GOOG) and Oracle (NASDAQ:ORCL). Of these four companies, Microsoft has the highest operating margin, the second highest gross margin and the third highest sales growth.

G3 Buzz:

After a hush-hush media event that happened last week, rumors emerged that Microsoft Inc. is going to reveal its “Smart Glass” app for the Xbox 360. In essence, this technology should allow Xbox 360 owners to control their consoles remotely in addition to streaming content from smartphones and tablets to their TVs.

Apple has done a similar thing with its AirPlay app, which allows iPhone users to stream to their HDTVs as well. This is big news for the videogame indsutry, but Microsoft will have to work to keep the spotlight with competitor Nintendo unveiling an entirely new console named the Wii U .

While Microsoft isn’t expected to launch a new Xbox at least for this year, the company is also drumming up interest in the next chapter in its popular Halo franchise as well as a new Gears of War game.

Current Ratings

Before you buy any stock, you should always run it through my free Portfolio Grader ratings system.  This company has improved notably in the past year; twelve months ago, MSFT was a D-rated stock. Since then, Microsoft has firmed up a number of its fundamentals, including cash flow and return on equity.

In addition, analysts have been more bullish with their earnings estimates, so this company has a strong analyst earnings revisions score. However, there is still plenty of room for improvement in terms of sales growth, earnings growth and operating margin growth.  What really makes this stock attractive is that buying pressure remains high for this stock.

Bottom Line

MSFT is an B-rated stock thanks to its strong Quantitative Grade. However, keep in mind that a dip in buying pressure could send this stock down to a C.

Recommendation: Buy

Sound Off

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Article printed from InvestorPlace Media,

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