Microsoft Corporation (NASDAQ: MSFT) is one of the largest technology companies in the world, having established itself as the dominant operating system for personal computing, and creating important productivity software with its Office suite. Microsoft shares rose with the tech sector following the 2008 market crash, but changing attitudes towards the company's portfolio drove significant deviations from the benchmark. Evolving consumer device preference jeopardized the long-term viability of its flagship products, causing Microsoft to explore new growth opportunities through enterprise productivity and cloud services.
Microsoft shares were $23.30 in June 2006 and grew to a 2007 peak above $37. The market crash brought Microsoft stock below $18 in early 2009, more than 50% below the recent high. Microsoft recovered rapidly, pushing shares above $30 by 2010, though 2010 and 2011 were not strong years for returns. The company saw a return to rapid appreciation in 2013 and 2014, as strong fundamentals and rising equity valuations pushed share prices to $50. Microsoft stock endured volatility in 2015, ultimately ending the year up again around $55. The first half of 2016 saw the stock settle back into the $50 range.
Microsoft sustained positive revenue growth over the decade, with the exception of the 2009 fiscal year. Sales growth rates ranged from 5.4 to 18.2%, with an average rate of 8.9%. The company's portfolio has evolved over time. Consumer licensing revenues became less important, while phones, tablets and enterprise-facing cloud products grew to contribute more of the total sales.
Intense competition in Microsoft's traditional product categories and negative effects of mix shift exerted downward pressure on the company's profit margins. Gross margin fell from 82.7% in the 2006 fiscal year to 64.7% in the 2015 fiscal year, marking the endpoints of a steady decade-long downward trend. The company reduced selling, general and administrative (SG&A) expenses throughout the period, but this was insufficient to sustain operating margins around 37% reported in 2006 through 2008. Operating margin moved closer to 30% in the 2014 and 2015 fiscal years. As a result, Microsoft's income growth has not kept up with the top line. Operating income had a 10-year average growth rate of 2.23%, and earnings per share (EPS) only grew an average of 2.83%.
Microsoft started paying a dividend in 2004, signaling the end of its growth era. That dividend has steadily risen over time, growing from 34 cents in the 2006 fiscal year to $1.21 in the 2015 fiscal year. The payout ratio also rose in 2013, 2014 and 2015. The stock price has reacted to this changing identity, as legacy products reached maturity before being supplemented with new growth categories.
Influence of the Market
The Standard & Poor's (S&P) 500 Index returned 68.1% from June 2006 to June 2016. Microsoft stock outpaced that benchmark by nearly 60 percentage points. Microsoft grew more quickly going into the 2008 crash, then it recovered more quickly in the immediate aftermath. The company further diverged from the market in 2013, as investors began to recognize the growth opportunities in the emergent cloud business. While Microsoft followed the same general pattern as the wider market, its performance was more volatile and was influenced by tech sector valuations. Microsoft stock prices had a correlation coefficient of 0.62 relative to the S&P 500 Index over the decade, so company-specific factors related to performance and outlook were evident drivers of price.
Technology Sector and Valuation
The Technology Select Sector SPDR Fund (NYSEARCA: XLK) returned 116% between June 2006 and June 2016, outpacing the wider market, but still short of Microsoft's performance. Tech stocks grew more quickly than the market throughout the recovery phase, as speculative and growth stocks tend to outperform during bull periods. More aggressive valuations in the sector supported higher prices, even in cases where fundamental growth was not superior. This helped drive Microsoft shares, which stood at an 18.6 forward price-to-earnings (P/E) ratio as of June 2016 and a 5.33 price-to-book (P/B) ratio. Microsoft stock prices and the Technology Select Sector SPDR Fund have a correlation coefficient of 0.71, indicating the importance of sector-wide trends for the company's pricing, but specific events clearly caused divergence throughout the decade.