New Microsoft in making?

If you have followed me for some time, you must have known how much I love Microsoft as a long term investment. Actually it is the biggest long term position I have with MSFT and I’m glad I’m doing so. Following the dot.com bubble burst in 2000, Microsoft had been dead money for 10 years trading as low as $20s for long time. I started to accumulate MSFT when it was in 20s and then added more in 30s, 40s and even 50s. While for many years no one was interested in Microsoft, I was a happy lonely buyer whenever there was a panic selling. You know I have even pounded the table several times here calling for buying MSFT. Why I’m so much in love with MSFT? Well, you got to understand for long term investment, you want to have your hard-earned money in a business that can be thriving in good or bad time and it can pay you increasingly over time with abundant cash generated from its underlying business. And very importantly you want to find a business which is greatly capital efficiency, meaning that it dose not require much additional capital to maintain and even expand its business, i.e. making more money with little money! You won’t find many companies that can say that and even more difficult to buy them for cheap. This is kind of stock that can really make you very rich if you simply hold them for long term and just let the compounding magic to work. I have demonstrated the million dollars path for buying and holding MSFT here when it was about $40. I hope you have bought some back then but honestly I wish MSFT would have not doubled and tripled since I got in but stayed low for long time, because it will make my million dollars much faster if it was just low in price. Too bad now MSFT is not dead money anymore and it is becoming another very hot tech star now.

So what has made MSFT so unique and so safe (if you don’t know, it is safer than the US government now and is one of the only two stocks with triple A rating). There are many of course but one of the major reasons for MSFT becoming such an unbeatable business is its great moat related to the high switching costs and powerful network effects. What do I mean? Well, among over 15 billion dollars businesses for MSFT, its best and long-lasting business that is the cash cow and is generating billions of dollars for MSFT each year is its boring business with Microsoft Office (Word, Excel, and Powerpoint). Can you tell me any companies and even governments worldwide that are not using the Microsoft Office and are till doing well with their business? I’m sure you cannot. For 2 decades, MSO is the only dominant office software that everyone is using. No one can compete with it. Google has tried with its Google sheets and docs but cannot even scratch the surface. When everyone is trained on the platform and using it, no one can afford to switch it as the cost is enormous and they are running the risk of losing their capability to communicate in their network. I don’t know Bill Gates was even realizing that when he developed this great software that has become something not replaceable in life. For any company, the biggest fear is the loss of their product’s competitiveness and outdated. I don’t see this happening any time soon for MSFT, likely not even in my life time. And the cost for producing and maintaining its competitiveness is negligible compared to how much cash flow it can brings in for MSFT. Talking about the capital efficiency!  That’s why you never need to be worried for MSFT for shortage of cash as it is simply making too much money each year. MSO is just one of such cash cows! I hope you can understand why I so much love MSFT and extremely confident in it for paying me increasing dividends year after year until I get millions of dollars by simply buying and holding it for enough time and without doing anything else. Of course I’m not talking about MSFT today to convince you to buy it now as it is not cheap anymore although I still believe one can do very well even buying it at this high price over $90. By understanding why MSFT is so great as a long term stock, you may look for new companies that are still early in their business but may very well be making a great moat for high switching costs and powerful network effects. Let me give you one example as food for thought.   

You must know by now what is the big trend for retailers. Yes, all the retailers must aggressively develop their e-commerce capabilities in order to survive now and in the future. But building up e-commerce is by no means easy and cheap to do as it is quite complicated involving many aspects that must work together and smoothly. That’s why companies that have proven track records of helping retailers to find and implement successful e-commerce strategy will thrive in the new era. CommerceHub (CHUBA) appears to be such a company. It develops a cloud-based platform that links suppliers, delivery services, brands, and demand channels together. Retailer gaining access to this platform may jump start to meet their customers' demands and remain competitive. Due to the effectiveness of the platform, many business giants such as Walgreens, Guess, Dell, Kohl's have already signed up for using CHUBA’s platform. If CommerceHub can maintain its competitiveness and attract more and more businesses for their e-commerce, it will create a great network effect that may cost companies big money to switch down the road. I certainly don’t mean CHUBA may become the next MSFT literally but it does have some unique feature mimicking the early stage of MSFT with respect to the switching cost and network effect. Be aware though that CHUBA is not cheap with PE at 70. Maybe a stock on your radar screen for future long term investment if it becomes cheaper someday.