I don’t often write about investing or the stock market. You probably shouldn’t put much stock in anything I have to say. That disclaimed.
You should be buying Microsoft, Apple and Google. And when you’re done buying you should buy some more.
MSFT currently trades at $22.45 a share. It has a $205 billion market cap, $43 billion in cash and TTM earnings per share were $1.86. Microsoft is selling for 12 times earnings. Excluding cash on the balance sheet (over $4 per share), MSFT trades at 9.5 times trailing twelve month earnings.
By way of comparison, six months ago, MSFT traded for 17 times earnings. A year ago MSFT traded for 25 times earnings. MSFT’s five year average P/E ratio is 26.7. It has traded as high as a 40 P/E in the last five years.
MSFT will never trade at a 40 P/E again. The company is too large and it already makes too much money. In many respects it is hard to see where Microsofts growth comes from. But if you buy MSFT now you are not buying it as a growth stock. You’re buying it because it is a value. Understand what it means to trade at 9.5 times earnings. It means that without any earnings growth at all you are buying a company whose earnings amount to over a ten percent return on your investment.
Put another way, if you pay $22.45 for a share of Microsoft, you are buying $4 of Microsoft’s cash and for the other $18 you are expecting Microsoft to earn about $1.80 a year.
And these are not your Enron type earnings. MSFT earns cashy-money which it uses to pay a dividend and buy back shares.
Let’s compare MSFT to Apple and Google.
Apple has an $88 billion market cap, a 19 P/E ratio and $5.12 TTM earnings per share. Apple has $27 billion in cash. Excluding cash, Apple trades at 13.4 times TTM earnings. That means that without any earnings growth, (excluding cash) Apple earns 7.46% a year on your investment.
Google has a market cap of $115 billion, a 23 P/E ratio and 16.07 TTM earnings per share. Google has $16 billion in cash. Excluding cash, Google trades at 19.55 TTM earnings per share. That means that without any earnings growth, (excluding cash) Google earns 5% a year on your investment.
Make your own decisions about the future prospects of these companies.
Personally however, I believe that these three companies, MSFT, Apple and Google are positioned to dominate the software industry for the foreseeable future. There are few if any other companies that can rival them. AOL done. Yahoo meandering in the desert. Amazon, maybe. Cisco, nah. Ebay, meh.
These three companies dominate the software/hardware/internet landscape. They dominate tech and there are few if any companies out there which have the resources (cash, programming skills, market share) to compete.
In classic value investing parlance, these three companies have a moat. Not a moat from each other. I do think they are going to eat each others lunch over the next decade. But they do have a moat from other companies in tech. More than a moat, these three companies are alone on the same island.
In the current market crisis you have the opportunity to pick them up for (excluding cash) 9.5, 13.4 and 19.5 times earnings. If I were you, I’d be buying all three.