Microsoft Looks Cheap—as Usual

By many measures, Microsoft (MSFT) looks like a bargain. The company, which reports earnings on Apr. 28, has more than $40 billion in cash and equivalents, a lock on the personal-computer operating system market, and profit margins that most companies would envy. The stock had a price-to-earnings ratio of about 11 on Apr. 26, 29 percent less than the Standard & Poor's 500-stock index's p-e of 15.5. No wonder 26 of the 34 analysts who cover it rate it a "buy," according to data compiled by Bloomberg.

Yet the stock is stuck. It closed at 26 on Apr. 26 a price it first crossed in 1998—and close to its average of 27 since the start of 2001. For the 10 years through Apr. 22, the shares delivered a total return of -7 percent while the S&P 500 returned 30 percent. For all its apparent luster, Microsoft is suffering from an identity crisis. It doesn't qualify as a growth company because it has failed to come up with successful new products that would create rapid profit gains, the way Apple (AAPL) has. And with a 2.4 percent dividend yield, it isn't doling out enough cash to satisfy value investors. Microsoft is in danger of becoming a value trap—a stock that always seems to be selling for less than it's worth.