J. Dowe Bynum, Portfolio Manager and Co-Founder of Cook & Bynum Capital Management, says that consumers may consider Microsoft Corporation (MSFT) to be less exciting than Apple Inc. (AAPL), which makes headlines with high sales of iPhones and iPads. But, Bynum says investors would be mistaken to adopt the same view. He says Microsoft not only has a lock on productivity software with Microsoft Office, but it also has servers in many offices.
“If you’re the tech guy at a company that’s got thousands of employees who are all running Windows on their computers and have a server or multiple servers in the tech closet, you’re not going to be the guy that shuts that down and tries something new,” Bynum says. “That is, not unless you can do it with substantial cost savings and can guarantee the change won’t cripple the business.”
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Bynum says that three or four years ago, Microsoft was selling at a price he calls “silly” relative to how high-margin and sticky its business is. What’s more, he says, Microsoft has been able to innovate faster than he anticipated.
“If they do better, if they get more and more people signed up for, say, Office 365, which is a subscription business — it’s where you don’t buy the Office disk for a one-time sale — it actually shows up in their income statement as deferred revenue because you can’t recognize it all at once, but it’s more beneficial to Microsoft,” Bynum says. “They earn more life of contract than they would have otherwise, and it’s also cheaper for you because now you don’t have to have a tech guy in your closet installing all these programs on your machines.”
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