• Everyone is well aware of Microsoft Corporation (NASDAQ:MSFT)’s storied historical growth record, which provides a classic case to watch a company progress into the maturation phase.
  • As a result of this slower growth, one might be inclined to believe that an investment thesis today is “late to the party.”
  • While it is true that the dynamics and capital attention of the business have changed, this does not necessarily rule out the possibility for a reasonable investment.

Everyone is keenly aware of the $300+ billion dollar company that is Microsoft Corporation (NASDAQ:MSFT). From the classic Windows and Office products to the latest Xbox and Skype, the business doesn’t exactly need an introduction. In fact, it’s quite likely that you are using or near a Microsoft product now; we used a couple just to get this article to you. So instead of providing a generic opening, we thought it might be interesting to highlight the company with some numbers.  There are 1.3 billion people that use Windows everyday and 1 in 7 of the world’s population use Office. Skype represents one third of the worldwide phone traffic and Outlook has 400 million users. Internet Explorer’s usage share is over 56%. In other words, large is a bit of an understatement.

As impressive as these numbers are, it also highlights the limitations of big. For instance, in the beginning a business can quickly increase its foothold from say .00001% of the market share to .00002%. Alternatively, Microsoft would literally be unable to double its Internet usage share. It already has over half the pie, so growth probably has to come from other areas. Trees don’t grow to the sky, or perhaps in Microsoft’s case: trees don’t grow to the stars.

With that, we thought it might be interesting to view Microsoft Corporation (NASDAQ:MSFT) in a slightly different manner from which we are accustomed. Being acutely aware of the phenomenal stock and business performance of the company over the last three decades – along with the general concept that the superior growth is a thing of the past – let’s view Microsoft’s progression using F.A.S.T. Graphs™.

When presented with the “default” or “regular” 15-year F.A.S.T. Graph it reveals quite a bit of information: earnings, dividends, the normal market multiple paid, a theoretical valuation, forecasted earnings and the corresponding relationships between those dynamics. Yet what is often overlooked is the idea that the graphs presented on Seeking Alpha are static such that they demonstrate a single time period of observation.

For instance, here’s the traditional 15-year default F.A.S.T. Graph, with 13-years of history and 2 forecasted years. This displays a good amount of information. It shows you that Microsoft grew “adjusted” earnings by a compound rate of almost 9% a year, it gives a theoretical and average valuation paid, shows whether or not the recessions had an effect on the business, demonstrates when Microsoft initiated a dividend and how the payout ratio has evolved. Perhaps most importantly, it illustrates the idea that where earnings go price eventually follows.

Microsoft

 

However, as good as this graph is and as quickly as it provides fundamental information about the business, it does have some limitations. For instance, it doesn’t explicitly reveal how the company’s growth rate has changed over time or whether the market has consistently offered a higher or lower valuation for shares. (Although to be sure, both are implicitly observable) Luckily, a F.A.S.T. Graphs’ subscriber has the option of viewing and reviewing a variety of different timeframes. In doing so, the graphs are dynamic such that new calculations are provided for each period viewed.

So, in keeping with the slowing growth trend of Microsoft, you might be inclined to view the growth rate during the 1990’s as compared to the last few years.

Below we have included an Earnings and Price Correlated graph from 1994 to 2000, using the Review feature. Here we can see that Microsoft did indeed have a staggering growth rate at nearly 43% per annum. Interestingly, despite the large price decline at the end of this period, an investor still would have realized total returns in the magnitude of 36% per year – turning a hypothetical $10,000 investment into $81,000. Note that the company was not paying a dividend during this time.

Alternatively, viewing the last 7 full years reveals a different bit of information. Over this period, Microsoft was able to grow earnings by about 11% per year – surely still a solid pace, but a far cry from the blazing 1990’s. Further, notice that Microsoft had begun paying a dividend by this time.

These two pictures of varying growth rates do a reasonable job of demonstrating the changing growth dynamics of the company. However, a subscriber could get even more detailed by looking at the compound earnings growth rates from each year. We’ve taken the suspense out of the equation and compiled this information ourselves:

Year

EPS Growth

1996

16.3%

1997

14.4%

1998

12.5%

1999

11.4%

2000

9.3%

2001

8.7%

2002

8.7%

2003

11.6%

2004

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