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Microsoft continues to pursue revenue-generating opportunities

Sales of Microsoft’s Windows 8 operating system have not lived up to expectations. (Associated Press)
Sales of Microsoft’s Windows 8 operating system have not lived up to expectations. (Associated Press)

Shares of Microsoft (Nasdaq: MSFT) grew by an annual average of 14.3 percent over the past 20 years, but only 4.5 percent over the past decade. Despite the reasons for the slowdown, the stock has some appeal at recent levels. It offers a 3.3 percent dividend yield, as well.

What, exactly, has been going wrong with Microsoft? Well, sales of its Windows 8 operating system have been disappointing. Its last reported quarter offered better-than-expected sales for Microsoft’s Surface tablet, but that device faces tough competition from iPads, Nexus 7s and others.

Bulls point to the company’s prodigious cash generation, but much of its income is tied to Windows and Office, which may suffer as PC sales have been shrinking. Even the Internet Explorer browser has been losing market share.

The company needs to develop big, new, profitable business lines, and it has several irons in the fire, such as a partnership with Nokia to develop inexpensive smartphones that could appeal to billions in developing markets. It’s developing original entertainment to stream on its home consoles, opening retail stores, and addressing the business realm with servers and other tools.

With a forward price-to-earnings (P/E) ratio of about 9 and tens of billions in cash in its coffers, the stock seems undervalued – as long as you have confidence in Microsoft’s future. (The Motley Fool owns shares of Microsoft.)

Ask the Fool

Q: Can you explain “vested” and “unvested” options? – S.Y., Grand Rapids, Mich.

A: You become “vested” when you become eligible to take ownership of something or exercise an option. Imagine that you work at Typewriter Depot (ticker: QWERTY) and you’ve been awarded stock options on 100 shares of company stock. Let’s say that over the next four years, 25 percent of the options vest each April 1. So on April 1, 2013, you’ll be able to exercise the option and buy 25 shares at the specified price. A year later, another 25 shares will “vest.” On April 1, 2016, you’ll be “fully vested” and can buy all 100 shares (or any shares you haven’t bought yet) – if you want to.

Companies structure rewards this way in order to motivate employees to stick around. Vesting schedules can vary, stretching over few or many years.

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My dumbest investment

This isn’t necessarily my dumbest investment, but it’s one I have questioned. I have nine grandchildren, and I bought a $50,000 variable-life insurance policy for each of them, paying an annual premium of several hundred dollars for each. My oldest grandchild has suggested that I should have invested the money in stocks instead. Quitting the insurance policies would mean paying heavy penalties and would leave the children unprotected. So I feel safe with the investment. – F.B., Endwell, N.Y.

The Fool responds: There’s a strong case to be made to invest long-term money for grandchildren in stocks. Even a mere $1,000 investment can grow to $45,000 over 40 years, if it averages 10 percent annually.

Life insurance is critical for those on whom others depend financially. It’s less critical for children or those without dependents. Their deaths would be sad, even tragic, but wouldn’t lead to financial hardship for their loved ones. It’s best not to think of life insurance as an investment, because there are more effective ways to invest, and without so many restrictions and penalties, too.