Microsoft (NASDAQ: MST) is a pretty good stock that has long been considered a value investment. Unfortunately, it is also one of those companies where the share price does not adequately reflect the business’s true value.

Currently, Microsoft seems to be overpriced; it was trading at $47.42 (€43.34) a share on August 4, 2015, even though it displayed some very weak financial numbers for the Second Quarter of 2015. Microsoft reported a revenue growth rate of -5.14% and a profit margin of -14.4% on June 30, 2015.

The software giant also reported a significant drop in revenues in recent months, which indicates that sales are falling. Microsoft reported a TTM revenue figure of $94.78 billion (€86.62 billion) on March 31, 2015, that fell to $93.58 billion (€85.52 billion) on June 30, 2015. That means Microsoft’s revenue fell by $1.2 billion (€1.1 billion) in the last quarter.

This is a company with a very questionable future, but it is still a very good company that makes a lot of money. The financial numbers indicate that Microsoft could still be a value investment even though it is overpriced.

Microsoft Is Still Making a Lot of Money

In spite of its problems, the available numbers indicate that Microsoft is still a cash cow and will remain so for some time. On June 30, 2015, the company behind Windows reported the following numbers:

  • A TTM revenue of $94.78 billion (€86.62 billion)
  • A net income of $12.19 billion (€11.14 billion)
  • A forward dividend yield of 2.65%
  • A dividend yield of 1.89%
  •  A free cash flow of $5.035 billion (€4.6 billion)
  • A return on equity of 13.79%

These figures indicate that Microsoft is still a very good company that makes a lot of money. Unfortunately, the revenue figures also indicate that it might no longer be able to maintain the ability to make that kind of money in the near future.

That means Microsoft might no longer be a widows and orphans stock—an equity that is a safe, steady moneymaker a person keeps for the long haul. Such shares are called widows and orphans stocks in the U.S. because they were purchased for those that need relatively stable sources of income.

The revenue figures definitely call the current share price of Microsoft into question. The stock’s value appeared to be based on steadily increasing revenues; well, now those revenues are falling rather dramatically.

It also means that Microsoft is now a far more speculative stock because it needs Windows 10 to be a huge success just to maintain its position. Since it is far too early to see how well that operating system will do, perhaps it is time to move this stock out of the value category and into tech.

So What Is a Good Price for Microsoft?

My interpretation is that a good price for Microsoft would be around $35 (€31.99) a share.

The revenue drops show that Microsoft is a far riskier investment than we thought. They demonstrate that it might no longer be able to maintain market share or income in today’s world.

The higher level of risk simply does not justify the $47.58 share price. Investors need to take the possibility that the collapse in revenues could continue and drag the company down with it into consideration.

Obviously, Microsoft could survive a serious revenue drop, but one has to wonder how long it could survive a -14.4% fall in profits. Such a profit collapse could indicate that the company’s business model is no longer working.

Microsoft is certainly a really good company with a lot of cash and a history of money making. Yet it is also a corporation struggling to make its business model work in a changing world.

The recent revenue drop indicates that Windows licensing might no longer be the cash cow it has been historically. If that is the case, Microsoft will need to change its business model radically just to survive.

It is hard to see how the company can do that and maintain the current levels of dividends or the current share price. At around $47 a share, Microsoft is definitely overpriced. Instead, the current conditions justify a share price of around $35.

Sadly enough, even a $35 a share price might be overvalued if this company cannot demonstrate some significant growth. It looks as if Microsoft could soon be a company in desperate need of a turnaround.

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