Microsoft: A Sleeping Giant Ready To Rise Again? (MSFT)

Microsoft was once the kind of stock investors dreamed of owning. Rising thousands of percent from its IPO in the mid-1980s to the late 1990s, Microsoft was at one point the largest U.S. company by market cap.

As technology evolved and Microsoft matured, Wall Street turned its focus to “sexier” areas of technology like Internet stocks. Operating system software wasn’t the in-thing anymore. Microsoft became a value stock rather than a growth play. Microsoft joined Intel as the first pure technology companies to become members of the Dow Jones Industrial Average. Nothing says “value stock” like being a Dow component.

More recently, Microsoft learned a lesson in futility by challenging Google (GOOG) in the search business. In addition, it falls well behind Apple in the consumer gadget arena. As such, many investors have passed over Microsoft.

This may be set to change though. Microsoft is a well-run company with a fortress-like balance sheet featuring $8.65 billion in free cash flow and $23.9 billion in total cash. That works out to $2.69 a share in cash. The shares yield 2.3%.

Microsoft hasn’t given up on challenging Google on the search battlefield. We’ve opined on how new technologies can be game-changers for certain companies. Consider how cloud computing could play the spoiler. What’s the near-term catalyst? Bing.

Microsoft is unlikely to top Google’s 60-70% share of the Internet search market, but it may be able to usurp one-time acquisition target Yahoo for the number two spot. For many followers of Microsoft’s shares, that may be good enough. Bing is just a month old and has yet to significantly impact Microsoft’s bottom line. However, the growth potential in search is compelling. Microsoft is spending heavily to advertise Bing. Early reports are promising.

Another catalyst to consider is a new upgrade cycle that is likely to follow the forthcoming introduction of Windows 7. Expectations are that Microsoft’s newest operating system will be far superior to the tedious Vista.

Microsoft’s profit margins are being challenged in the low-cost “netbook” segment, where many manufacturers offer Linux-based alternatives. However, manufacturers of netbooks are finding sales accelerating once Windows is loaded, and Microsoft might be pleased to sacrifice margin in favor of volume.

The stock seems to be firmly supported around $22. Microsoft’s point-and-figure chart also shows a bullish trend, with a price objective of $33.50. Microsoft’s war chest of cash and their ability to sparkle with products like Bing makes the company an attractive long-term bet.

To play Microsoft’s refocused foray into search and a newly-invigorated Windows, go with MSFT.