Microsoft Annual Report 2004
I received Microsoft’s Annual Report in the mail yesterday. At first glance, the plain cover felt like it was a report from Berkshire Hathaway, made famous by Warren Buffet’s simple, no-nonsense approach to dealing with shareholders. But no, this was from Microsoft, one of the most profitable companies of our time.
I quickly rummaged my bookshelf and found the 2003 report. What a difference - the 2003 report had a full-colour title page, with no less than four pages of colour photographs inside. The 2004 report could not have been plainer. What’s happening here?
I’ve always admired Microsoft for its financial prudence and its responsible attitude towards its shareholders. Despite its $60 billion in cash, its never chosen to grow aggressively through reckless acquisition or investments. It has recently decided to return the money to shareholders through a mixture of dividends and stock buy-back. Now, in the 2004 report, I read that its decided to expense stock options as well. So perhaps this is another small example of how the company wishes to communicate that they are serious about providing value for their shareholders, even to the extent of trimming its annual report to its bare minimum.
But yet, its stock price has languished in the last three years - its price now is at the same level as it was when I first purchased in 2001. Its revenues and income continue to rise, and they have continuously found ways to innovate and to compete strongly even in new markets (Xbox vs Sony’s Playstation).
What went wrong?
Its my belief that investors now consider Microsoft as a mainstream company with limited growth opportunities. It has been fenced in and under siege by law suites brought against it by various groups around the world. It cannot grow as aggressively for fear of attracting more hostility from consumers and regulatory bodies.
However, it still holds a strong position in the IT industry, where its products are the de facto standard for desktop users, even if its not been able to dominate the corporate server room. Its operating system and office productivity tools are crucial to the proper functioning of most computers, and there is no evidence that its competitors can effectively threaten its market share.
In my blunt opinion, I don’t expect that any continued ownership of this company will provide above average growth rates in the medium term. For the time being, I will hold on until a better idea presents itself.