A lot of investors seem to be permanently down on Microsoft (Nasdaq:MSFT) and its ability to compete effectively in the coming years, but the numbers tell a different story. True, Microsoft today is not the Microsoft of old and there are signs of bloat, but the cash generated by this business is both formidable and undervalued. With good growth in areas like enterprise software, and three upcoming product launches, investors ought to consider these shares.

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Third Quarter Results Show Some Kick
Microsoft reported a pretty good third quarter. Revenue rose 6% and did reasonably well across the board, relative to expectations. Windows revenue was up 4% as the company sees an improving PC market and success in combating piracy. Online and Business were up 6 and 9% respectively, while the Server and Tools business saw 14% revenue growth. Entertainment was the notable laggard, falling 16%.

Profitability also improved significantly (and beat many expectations). Gross margin rose about a point, while operating income rose nearly 12%. Growth was led by the Server/Tools and Business segments, while Entertainment again went against the grain.

Will Launches Drive the Stock Higher ?
Although I fear a "buy the story, sell the launch" effect with Microsoft shares, the company has three major launches coming up for its fiscal 2013. The company will be releasing a new version of Windows (Windows 8), Office 15 and Server 2012.

At a minimum, this should drive an upgrade cycle. I also believe, though, that more thorough support for touch and mobile will help Microsoft improve its positioning in the tablet/phone market, and help offset the gains made by companies like Google (Nasdaq:GOOG).

SEE: A Primer On Investing In The Tech Industry


Enterprise - Can They Do it Alone?
Microsoft is doing pretty well in its enterprise software business, at least relative to other large enterprise software providers like IBM (NYSE:IBM), CA (Nasdaq:CA) and Oracle (Nasdaq:ORCL). What I find interesting is that Microsoft has, at least on a relative/comparative basis, sat out the big wave of enterprise IT acquisitions. With such a large cash pile on hand, it's worth asking if M&A is a missed opportunity for improving growth and returns.

Can Entertainment and Online Produce Value?
Microsoft's Entertainment and Online efforts continue to confound me a bit. While I understand that Entertainment numbers are being pushed by the age of the Xbox 360 cycle, has this unit never earned its cost of capital?

Likewise, search market share numbers suggest that Microsoft is not only far behind Google, but not closing the gap in any meaningful way. I realize that Microsoft management is convinced that they have to remain in the online market, but I question whether this is time, money and energy well spent, at this point.

The Bottom Line
Microsoft produces an exceptional amount of free cash flow, but many tech investors seem more interested in the single-digit revenue growth rate. Even if Microsoft barely grows, even if it doesn't grow at all, the annuity cash flow stream appears undervalued today.

Microsoft isn't going to be a multi-bagger, but investors looking for a stock that could see a slow-and-steady appreciation may want to investigate this stock further.

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At the time of writing, Stephen Simpson did not own shares in any of the companies mentioned in this article.

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