Company Review - Why Buy Microsoft Stock

Say what you want about the superiority of Unix. The awesome server capability of Linux. The ease of a Macintosh. To the average user these operating systems might as well be coded in a dead language. Your every day John Smith wants to learn only enough to be able to jump on the back of a giant hay truck trundling down the information highway, not ratchet a street legal Ferrari through a ten gear stick on the Autobahn.

Let's forget all of Microsoft's peripheral interests such as the Xbox and get down to the core issue that represents long-term value-software.

For our purposes think of Windows as a central belief system with the power to adapt itself to any common tongue. I'll explain.

In the 1500s the Catholic Church lost its stranglehold on the Christian faith because wouldn't give up on Latin. There was a major problem with their software: only the intellectual elite could understand the code. Parishioners didn't understand a single word and had no way to read their holy book, the early day equivalent of the internet. Unrest brewed.

When the Protestant Reformation hit Europe like a fat kid cannonballing into a swimming pool Christianity experienced resurgence in popularity. Suddenly people could jump into the details of their religion, the giant hay truck of its day, because it adapted itself easily to their native language, the personal computer.

This is the same kind of power drives the former, current, and future success of Windows as an operating system and Microsoft as a company. Yes, you can format your hardrive to speak difficult languages, but do you really want to go through all the trouble to learn it?

The numbers say you don't. According to online analysts OneStat.com, 97% of the world's computers still run on Windows despite the fact that Microsoft has not released a new version in 5 years. Apple only has a 2.5% lock on the world market, never mind recent hubbub about the increasing popularity of the Mac. (Every ten years or so Apple stages a 'big comeback' and Appleheads like to pretend that the human race has ushered itself into a bright shining Age of Mac. Invariably their hopes are dashed.)

So why is this important now?

If you think the world's going back to Latin any time soon, it's not.

If you figure as I do however, then right now Microsoft is a criminally good buy.

Naturally the upcoming release of Windows Vista is a factor. What's bad for box makers like Dell (DELL) and Hewlett-Packard (HPQ) in the form of market saturation is good news for Microsoft. It has a large built in customer base with high intellectual switching costs. Forget the negative press about setbacks. When Windows Vista is released there will be 556 million computers - 97% of the current worldwide total - waiting for an upgrade. And that's nothing. According to Forrest Research, by 2010 there will be an additional 744 million personal computers in the world, at a total of 1.3 billion.

As a worst case scenario let's say Microsoft manages to sell Vista to only half the current machines running Windows XP at an extremely conservative price of $100. Just Vista. No support software, no extras, none of the more pricey business suites. That's a $27.8 billion gross profit. Hey, I'll take $27.8 billion on a bad day.

Then there's the Google issue. I could do it point by point but look: you're completely missing the point. Microsoft is an operating system. Google is a…web site. Undoubtedly a big part of the continued success of the Windows operating system is the Microsoft Office suite of applications. Sure, if Google comes up with web applications that do a better job than MS Office, Windows might start showing some stress cracks. But Google hasn't done that yet.

Don't count Microsoft out of the search race either. Technologically speaking search is a toddler. It is far from perfect. With Microsoft sitting on a giant pile of cash - $43 billion-and throwing money at ways to come up with the next hot ticket in search there's no lock on who's got the next market shaking innovation. Sure, Google's winning battles now, but Microsoft has a long history of successful wars.

Disclosure: I do not own shares in any company mentioned in this article, however I'm seriously considering buying Microsoft.