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Understanding Microsoft’s Value Proposition in the US Software Space

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Microsoft’s scale in systems software

Previously in this series, we discussed Microsoft’s technical indicators. Now, let’s look at its value proposition among other system software companies in the United States. The systems software space comprises OS (operating systems), system and network management, and information management. Microsoft is a leading player in this segment with a majority of personal computers using Windows OS.

On July 18, 2017, Microsoft (MSFT) was the largest global player in terms of market capitalization, followed by Oracle (ORCL). IBM (IBM) was third in market capitalization. Salesforce (CRM) and SAP (SAP) are also leading players in this space.

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Enterprise value multiples

Microsoft was trading at a forward EV-to-EBITDA[1. enterprise value to earnings before interest, tax, depreciation, and amortization] multiple of ~13.5x on July 18, 2017. This metric was higher than IBM’s multiple of ~9.5x and Oracle’s multiple of ~10.9x. SAP’s and Salesforce’s metrics were 14.9x and 28.4x, respectively.

Dividend yields

Microsoft’s forward annual dividend yield was ~2.1% on July 18, 2017, lower than IBM’s forward dividend yield of ~3.9% but higher than Oracle’s forward dividend yield of ~1.5%. While Microsoft is preferred by investors due to its increasing cloud prowess, IBM and Oracle are trying to achieve the same goal by focusing on dividends.

SAP’s forward yield was ~1.3%. Salesforce doesn’t pay dividends.

In the final part of this series, we’ll look at analysts’ recommendations for Microsoft.

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