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.