Oh, he's not that worried.

These are strange times for Microsoft. On the one hand, the software giant is more successful than ever. While many competitors disappeared or flat-lined since the tech boom turned to bust five years ago, Microsoft grew revenues by 73% over the period, to nearly US$40 billion. That is an impressive 9.5% per year of compounded growth in a supposedly moribund personal computer software market.

Mighty Microsoft's impressive financials don't stop at the top line. It continues to pour out cash like a very large vault with a leak. Consider: Microsoft produced more than US$16 billion in free cash flow last year, and hasn't produced less than US$10 billion a year in cash in the past five years. While that cash production would be remarkable in any company, it is more so when you consider that over the past 12 months Microsoft converted 41% of its sales into free cash. That is stupendous, outrageous and envy-inducing. Why? Well, Wal-Mart produces similar amounts of cash, but the retailer requires more than seven times the revenue--almost a quarter trillion dollars--to turn the trick.

What's not to like? Growth, cash flow and an, ahem, absurdly strong position in the PC software market, a position so daunting that some people--just some, mind you--intermittently use the M-word ("monopoly") to describe Microsoft's market puissance.

But there is apparently plenty not to like. Microsoft's share price has stagnated, and recently two of the biggest business magazines on the planet, BusinessWeek and Fortune, ran cover articles on the decline of the once indomitable company. What's the problem? Well, it is not the obvious stuff, like, say, market valuation. You might expect Microsoft to trade at a hefty premium to peers, as it has through most of its existence, but it doesn't. Its forward price-to-earnings ratio is not far off its recent year-over-year growth, suggesting an attractive valuation based on its profits, a condition that has not existed in the recent stock-trading history.

Why the low price? For starters, some fret that Microsoft can't grow as fast as it did a decade ago. And they're darn right it can't. Microsoft grew revenue 29% in 1995, while it grew fiscal year 2005 revenue "only" 8%. The thing is, adding 29% to 1994 revenue meant finding US$1.4 billion--roughly one Research In Motion, to put it in Canadian terms. Adding 29% to 2004 revenue would have meant adding 7.6 RIMs--not exactly a straightforward task. It is the law of large numbers at work: You can't grow as fast when you get big.

But so what? There is nothing wrong with Microsoft's growth, given its share price, and so let Google chase off expensively trying to outrun hordes of venture-backed companies with better search algorithms. More power to 'em. Google is certainly sexy, and you have to love what founders Sergey Brin and Larry Page have pulled off. But given the choice of owning Microsoft or Google--the entire company, I mean--I'd own Microsoft in a heartbeat. There's just no comparing a horse race to owning a monopoly.

Don't Microsoft's critics see that? Sort of, but just as they figure out that it's not about being techno-hip but about making money, they get sidetracked again by just how darn nifty Google seems. To be fair, how outmoded and behind Microsoft can sometimes seem, as it makes yearly big noises about the latest iteration of its instantly outmoded search software. More worrisome, Microsoft is having real problems shipping PC software on time; its Longhorn operating system release has finally mutated into Vista, a stripped-down version of what was supposed to have been here years ago.

Here, however, is what people are forgetting. While Google quests for the next thing that will add billions to its revenue and keep the share appreciation game going, Microsoft is entering, in 2006, the biggest product release year in recent memory, with major new versions due for Windows and Office, among others. While Microsoft is never going to return to the halcyon days of its youth, I'll wager with readers its shares will outpace Google's over the next 12 months. If I'm wrong, well, eating a copy of BusinessWeek isn't such a big deal now that it's electronic.

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By Paul Kedrosky

Paul Kedrosky (pkedrosky@ucsd.edu) teaches at the University of California--San Diego and is a venture partner with Ventures West Management in Vancouver.