Bill Gates is super abundant but his once high-flying software business may be within the doldrums because mid-2002 after falling from the $35 degree. The trouble with Microsoft (MSFT) may be its failure to grow both its revenues and earnings at the superlative rates the organization as soon as enjoyed.
Any business the dimension of Microsoft, having a market-cap of $242 billion, will locate progress an concern because of its dimension. But this is not to say the stock is dead. Far from it, Microsoft remains a viable long-term computer software organization and is money rich with $34 billion or $3.28 per share in money. This gives the stock a lot of monetary flexibility to produce or purchase growth technologies. Microsoft just announced it would spend $1.1 billion in R&D at its MSN Internet unit inside the FY07. And according to the Wall Street Journal, Microsoft is exploring the possibility of taking a stake in Internet media company Yahoo (YHOO) to take on Internet advertising behemoth Google (GOOG).
But with an estimated five-year earnings progress rate of a pitiful 12%, the business has its work cut out for it. Trading at 16.30x its estimated FY07 EPS of $1.44, the stock is not expensive but appears to be priced not as a development stock.
Its PEG on the surface of 1.51 is not low-cost, but if you discount within the money of $3.28 per share, the estimated PEG falls to around 1,0, a decent valuation. Also, if Microsoft can improve on its estimated 12% development rate, the PEG would decline further.
The fact is Microsoft at the current price deserves a look. If you want to play the stock but don’t want to shell out the $2,347 for a 100-share block, you might want to take a look at the long-term options, 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 currently costs $380 a contract (100 shares).
This means you risk a total of $380 for the chance to participate within the potential upside of 100 shares of Microsoft over the next 20 months. The breakeven price is $26.30. If Microsoft breaks $26.30, you would begin to make funds on your LEAPS. Conversely, if Microsoft fails to do anything, your maximum risk is $380 on the initial option play.
Warning: The aforementioned example is for illustrative purposes only and not to be construed as an actual option method. Due to the higher risk inherent in options, I recommend you speak with an investment professional before deciding to employ any strategy involving options.
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