3 Reasons to Buy Microsoft

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I recently went over three reasons to sell Microsoft (NAS: MSFT) , so in fairness let's take a look at the flip side of that coin. The company is at an inflection point in its business and has a chance at successfully transitioning into future growth trends.

1. Windows 8
I like Windows 8, plain and simple. I think Microsoft's next-generation operating system is an ambitious redefinition of what consumers can and should expect an operating system to be. It features the innovative Metro interface taken from its Windows Phone mobile OS, and Microsoft is strategically coming to terms with the fact that maybe the free-for-all days of open partnerships are over.

Apple (NAS: AAPL) has shown the value in an integrated hardware and software approach, and Microsoft's Surface announcement was the sincerest form of flattery that the Mac maker could have asked for. Not that Apple needed validation from its rival from Redmond -- the billions upon billions in profits suffice there. Rather, Microsoft saw Google flail about in the tablet market before the Nexus 7, showing that too open also isn't a good thing.


Microsoft is attacking tablets from just about every angle imaginable: first-party hardware, multiple OEM partnerships, support for both Intel (NAS: INTC) and ARM Holdings-based chips, aggressive courting of developers, and more. Windows 8 also represents a radically different approach to tablets than Apple is taking, which it has coined as PC+.

Bill Gates described "PC Plus" as early as 1999, but the recent approach involves categorizing tablets along with traditional PCs and supporting both desktop and touch-optimized interfaces simultaneously, a stark contrast to Apple's, whereby mobile devices are separated from their legacy counterparts.

Even as the iPad is the fastest-growing Apple product in history, the overall tablet market is so young that it could change directions if consumers go with Microsoft's broader vision.

2. Servers and tools
Microsoft has been slowly but surely building its servers and tools segment, with its operating income consistently and steadily marching higher over the years. This is the division that includes Azure cloud hosting, Windows Server, and SQL Server.

Source: SEC filings. Entertainment and devices and online services divisions omitted. Calendar quarters shown.

Source: SEC filings. Entertainment and devices and online services divisions omitted. Calendar quarters shown.

This chart shows the server segment relative to Microsoft's two biggest longtime cash cows, Windows and Office. Since the beginning of fiscal 2005, the segment has climbed from just $455 million in quarterly operating income to $2.1 billion last quarter.

Microsoft Azure may have a tough time stealing market share from Amazon.com's (NAS: AMZN) EC2 and Rackspace Hosting (NYS: RAX) , especially as Amazon is known for aggressive pricing and Rackspace for customer loyalty and "fanatical support." Still, the results speak for themselves, and this segment is definitely riding the clouds to riches.

3. Value and dividend
Microsoft is cheap. Shares trade at modest multiples even as the overall company just posted record fourth-quarter and full-year results last week. The company also boasts consistent cash flow, a respectable dividend yield, and a healthy earnings payout ratio.

Company

P/E

P/S

P/FCF

Yield

Payout Ratio

Microsoft15.33.511.22.6%39.6%
Apple15412.9TBDTBD
Google17.64.515.1NANA
Intel112.4NA3.234.2%

Source: Reuters. TBD = to be determined. NA = not applicable.

Apple is set to begin paying out a dividend in its fiscal fourth quarter, so its yield and payout ratio are to be determined, while Google has never paid a regular dividend. Intel is fairly comparable in valuation and payouts, which can be expected as Wintel are longtime partners in crime.

There's a lot for value and dividend investors to like about Microsoft.

The good ol' days
Microsoft's growth days may be over, but its value days look like they'll be around for quite a while. The company's cash flows and dividends are safe thanks to the maturing of a third cash cow. The success of Windows 8 remains to be seen, once the OS is launched later this year, but it could potentially be a major catalyst in Microsoft's bread and butter.

For now, Apple continues to call the shots in the tablet market, which is why its run isn't over yet. Sign up for this brand-new premium research service that's all about Apple to read more.

The article 3 Reasons to Buy Microsoft originally appeared on Fool.com.

Fool contributorEvan Niuowns shares of Apple and Amazon.com, but he holds no other position in any company mentioned. Check out hisholdings and a short bio. The Motley Fool owns shares of Microsoft, Amazon.com, Google, Apple, and Intel.Motley Fool newsletter serviceshave recommended buying shares of Microsoft, Apple, Amazon.com, Rackspace Hosting, Intel, and Google and creating bull call spread positions in Microsoft and Apple. We Fools don't all hold the same opinions, but we all believe thatconsidering a diverse range of insightsmakes us better investors. Try any of our Foolish newsletter servicesfree for 30 days. The Motley Fool has adisclosure policy.

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