What Is Microsoft’s Value Proposition in the US Software Space?



Microsoft’s position in systems software

Previously, we discussed Microsoft’s (MSFT) role in the S&P 500’s (SPX) recent surge. Despite the massive surge in Microsoft stock, which helped its market cap to cross the $713 billion mark, it was momentarily eclipsed by Amazon (AMZN), which has a market cap of ~$710 billion. As of February 20, 2018, Microsoft continued to be the largest software player. Oracle (ORCL), with a market capitalization of ~$206 billion, came in second. With market caps of ~$27 billion and ~$25.6 billion, ServiceNow (NOW) and Red Hat (RHT) placed third and fourth, respectively, while Tableau Software (DATA) held fifth place.

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Valuation and dividend yields

Let’s compare Microsoft’s and peers’ EV-to-EBITDA (enterprise value to earnings before interest, tax, depreciation, and amortization) multiples. EV refers to the market value of a company’s debt and equity excluding cash and cash equivalents. EV-to-EBITDA multiples are ideal when investors need to consider the valuation of an overall company, not just its equity.

On February 20, Microsoft was trading at a forward EV-to-EBITDA multiple of ~15.3x. In comparison, Oracle’s multiple was ~10.4x and Red Hat’s was ~31.4x. Microsoft’s forward annual dividend yield was ~1.8% as of February 20, higher than Oracle’s ~1.5%. Dividend payout indicates how much a company pays in dividends in relation to its stock price. Microsoft stock’s consistent rise has thereby reduced its dividend yield. Dividends are preferred by shareholders and investors alike as they view it as steady income, especially amid increasing uncertainty and volatility. Currently, ServiceNow and Red Hat don’t pay dividends.


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