This account is pending registration confirmation. Please click on the link within the confirmation email previously sent you to complete registration.
Need a new registration confirmation email? Click here
Stocks Under $10 with 50-100% upside potential - 14 days FREE!

Mister Softee's Fallen and He Can't Get Up

Equity investors can't find a safer haven than Microsoft (MSFT). That's the conventional wisdom, and it was probably true in the past. But in the last three months, Microsoft has lost 15% of its value, more than twice the decline of the Nasdaq as a whole.

What's more, the world's largest independent software company has performed worse than 10 other software companies [see chart] with market caps of $4 billion or more, and worse than other "mega-cap" companies (valuations over $90 billion), including General Electric (GE), ExxonMobil (XOM), Intel (INTC), Wal-Mart (WMT) and Cisco (CSCO).

Even Hewlett-Packard (HPQ), which earlier weathered a grueling fight over the Compaq merger and is now enmeshed in the PC slump, is performing similarly, down 17% over the same time period.

Microsoft investors are being punished for a variety of problems, most of which are the products of the prolonged slump in IT spending.

The serious bloodletting began after the company announced solid second-quarter results -- and disappointing guidance -- on Jan. 16. The stock closed that afternoon at $55.35 (presplit) and by Jan. 22 it had tumbled $4.35 a share, or 8%, to $51.

The biggest disappointment: Rather than projecting earnings of $1.98, Wall Street's consensus, Microsoft said it expects (presplit) earnings per share of between $1.90 and $1.93 in fiscal 2003.

But that's not all:

  • Some investors took the company's decision to issue its first-ever dividend (16 cents) as a sign that Microsoft's growth days are behind it.
  • Because Microsoft is so widely owned by mutual and index funds, the general flight away from equities has hit the company hard, says Daniel Morgan, research director for the $100 million Noble Financial Group.
  • The company is trading at about 23 times forward earnings. That may be too rich at current growth levels. And there's no obvious catalyst that would stimulate near-term growth.

  • Software and the Comp
    Microsoft leads the pack downward
    Company %Performance since Dec. 10
    Microsoft -15
    PeopleSoft -12.3
    SAP -7.6
    IBM -6.3
    Intuit -6.1
    Nasdaq -6
    Veritas -4.4
    CA -1.5
    Oracle -0.6
    Adobe 2.3
    Siebel 3.5
    Symantec 7.2
    Source: Company reports

    Shortly before Microsoft executed its 2-for-1 stock split on Feb. 18, shares bounced up, leading some analysts to say that investors were done punishing the company. It's more likely that the run-up was based on expectations that retail investors would jump into the stock when the absolute price dropped by half, Morgan said.

    Any lift the company received has largely evaporated. "It's not time to back up the truck and load up on shares," said Peter Miesk, software analyst with Scotia Capital. Long term, Miesk is bullish on the stock, with a target price of $30. "But on the way we may well see lower prices," he said in an interview. Scotia does not have a current banking relationship with Microsoft.

    1 of 3

    Select the service that is right for you!

    COMPARE ALL SERVICES
    Action Alerts PLUS
    Try it NOW

    Jim Cramer and Stephanie Link actively manage a real portfolio and reveal their money management tactics while giving advanced notice before every trade.

    Product Features:
    • $2.5+ million portfolio
    • Large-cap and dividend focus
    • Intraday trade alerts from Cramer
    • Weekly roundups
    TheStreet Quant Ratings
    Try it NOW
    Only $49.95/yr

    Access the tool that DOMINATES the Russell 2000 and the S&P 500.

    Product Features:
    • Buy, hold, or sell recommendations for over 4,300 stocks
    • Unlimited research reports on your favorite stocks
    • A custom stock screener
    • Upgrade/downgrade alerts
    Stocks Under $10
    Try it NOW

    David Peltier, uncovers low dollar stocks with extraordinary upside potential that are flying under Wall Street's radar.

    Product Features:
    • Model portfolio
    • Stocks trading below $10
    • Intraday trade alerts
    • Weekly roundups
    Dividend Stock Advisor
    Try it NOW

    Jim Cramer's protege, David Peltier, identifies the best of breed dividend stocks that will pay a reliable AND significant income stream.

    Product Features:
    • Diversified model portfolio of dividend stocks
    • Alerts when market news affect the portfolio
    • Bi-weekly updates with exact steps to take - BUY, HOLD, SELL
    Real Money Pro
    Try it NOW

    All of Real Money, plus 15 more of Wall Street's sharpest minds delivering actionable trading ideas, a comprehensive look at the market, and fundamental and technical analysis.

    Product Features:
    • Real Money + Doug Kass Plus 15 more Wall Street Pros
    • Intraday commentary & news
    • Ultra-actionable trading ideas
    Options Profits
    Try it NOW

    Our options trading pros provide daily market commentary and over 100 monthly option trading ideas and strategies to help you become a well-seasoned trader.

    Product Features:
    • 100+ monthly options trading ideas
    • Actionable options commentary & news
    • Real-time trading community
    • Options TV
    To begin commenting right away, you can log in below using your Disqus, Facebook, Twitter, OpenID or Yahoo login credentials. Alternatively, you can post a comment as a "guest" just by entering an email address. Your use of the commenting tool is subject to multiple terms of service/use and privacy policies - see here for more details.
    Submit an article to us!
    DOW 17,083.60 +4.03 0.02%
    S&P 500 2,000.90 +4.16 0.21%
    NASDAQ 4,573.3390 +15.6440 0.34%

    Brokerage Partners

    Rates from Bankrate.com

    • Mortgage
    • Credit Cards
    • Auto

    Free Newsletters from TheStreet

    My Subscriptions:

    After the Bell

    Before the Bell

    Booyah! Newsletter

    Midday Bell

    TheStreet Top 10 Stories

    Winners & Losers

    Register for Newsletters
    Top Rated Stocks Top Rated Funds Top Rated ETFs