7/21/2011 3:00 PM EDT
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I'm warming up to Microsoft. Despite Greenlight Capital's David Einhorn calling for Steve Ballmer to step down, there have been very promising developments at the company under the CEO's watch. I believe Microsoft may be at the brink of its best run since Ballmer took over.
- Skype looks like a winner. Microsoft will be able to use it for both its consumer and business customers, giving it twice the utility that a Google or a consumer company could have. That justifies the higher acquisition price paid, and Skype allowed Microsoft to use some of its plentiful foreign cash.
- Xbox seems to be the only game console that's still growing. Its latest sales numbers look very healthy. Call it a bump from motion-detecting Kinect, but it's still working.
- Kinect is probably the most exciting homegrown technology to come out of Microsoft Research. There are thousands of applications for the technology. It's something you would have expected from Apple, not Microsoft.
- Windows 8 is rumored to be coming out sooner than expected.
- Microsoft's cloud offering, Office 365, looks solid.
- The company recently beat Google to claim part of Nortel's treasure trove of patents. This allows Microsoft to pursue its strategy of claiming part of the ongoing revenue stream from the growth of Android devices. It seeks $15 per handset from Samsung for its Android phones. HTC has already agreed to pay Microsoft $5 a phone.
- Windows 7 phones have yet to appear, but Microsoft hopes to sop up the low-end of the growing smartphone market with Nokia (NOK - commentary - Trade Now) as its key partner.
- Research In Motion (RIMM - commentary - Trade Now) keeps bleeding market share. With no new phones from RIMM featuring the QNX operating system planned until late 2012, its market share should continue to drop precipitously. Microsoft should be in an even stronger position to pick up share from RIMM's stumbles.
- Office, even before the cloud offering, has never been stronger. Google Apps is nowhere.
- There is no expectation for search engine Bing to do well, yet it keeps chipping away at Google's market share.
What else could drive this stock? A recent anonymous letter to Microsoft (later said to be from Ivory Investment Management) presented several sound suggestions for managing its cash:
- Use 100% of its domestic free cash flow, while borrowing against free cash overseas, to make a big, one-time buyback now (borrowing at 3% to buy a stock that has a 12% free-cash-flow yield).
- Make regular buybacks thereafter (9% of the float each year).
- Increase the dividend to 6% from 2.3% (I suggested this kind of dramatic increase last year, but to no avail).
Ballmer will see a big buyback as a non-starter -- been there, done that is his likely response. He also has a deep skepticism of "quick fixes" suggested by Wall Street.
It is reasonable, however, that Microsoft's board could be convinced that a more dramatic dividend yield -- along with regular buybacks -- is beneficial to all and doesn't impinge on the growth of the company. Should that happen, there could be a dramatic repricing in the stock's shares.
There's also the chance that Ballmer quits. There's likely to be a one- or two-day pop in the stock if that happens. But my read is that Ballmer isn't going anywhere. I believe he knows that he has something good at Microsoft. If I were Ballmer, hearing Wall Street's bellyaching for 10 years, I'd want to be around when several initiatives in the works finally come to fruition.