Comment on Microsoft (ticker MSFT)

The point of this post is to show what happens when one of the three basic interested parties in a business (employees, investors, government) takes the lion's share of value created by a business. In this case, it is the employees. It may have relevance in the near future if laws are changed counter to investors' interests or taxes increase on businesses.

Flipped through CNBC today and the topics was "Why has MSFT gone sideways for a decade?" The hosts put up data showing how revenue has almost tripled and operating income has more than doubled. Everyone pointed to different things about failure to capture the mobile market, etc. I believe it is due to a more basic issue.

Revenue 2000 vs 2010: $23.0 billion - $62.5 billion (up 171%)
Op Inc 2000 vs 2010: $10.9 billion - $24.1 billion (up 121%)

I actually was a part of the team at Robertson Stephens that covered Microsoft a decade ago. The analyst, Alex Baluta, dropped them to a Hold from Buy. Later, another analyst, Eric Upin, took it over and together we kept it at a Hold. The call turned out to be correct, although controversial at a time when everyone thought it was a good place to hide in a tech storm. A few years later I was working at a hedge fund and got into a debate about MSFT. The other analyst argued that because the company was re-purchasing billions of dollars worth of shares each year, the stock should go up. I asked him why the share count never went down. I don't think he ever bought shares in MSFT.

So going back to CNBC, the critical piece of information they missed was that the diluted share count has increased 61% in the past decade, from 5.5 billion to 8.9 billion. This increase in share count combined with a falling ROIC has produced a flat stock price. ROIC determines over 90% of a stock price, as estimated by my work with it covering stocks. The falling ROIC is largely a result of simply unsustainable returns as the company diversified from the monopolies in Office and Windows.

So, employees have received generous stock distributions and therefore have captured the value added by the company, at the expense of investors. The share count has started to tick down modestly the past couple years, a sign management is finally sharing more of the pie with investors. Unfortunately, after a lost decade to investors, they are asking the question: "Why should I care?"