This Day On The Street
Continue to site
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

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 - Get Report), ExxonMobil (XOM - Get Report), Intel (INTC - Get Report), Wal-Mart (WMT - Get Report) 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

    Check Out Our Best Services for Investors

    Action Alerts PLUS

    Portfolio Manager Jim Cramer and Director of Research Jack Mohr reveal their investment tactics while giving advanced notice before every trade.

    Product Features:
    • $2.5+ million portfolio
    • Large-cap and dividend focus
    • Intraday trade alerts from Cramer
    Quant Ratings

    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
    Stocks Under $10

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

    Product Features:
    • Model portfolio
    • Stocks trading below $10
    • Intraday trade alerts
    14-Days Free
    Only $9.95
    14-Days Free
    Dividend Stock Advisor

    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
    • Updates with exact steps to take - BUY, HOLD, SELL
    Trifecta Stocks

    Every recommendation goes through 3 layers of intense scrutiny—quantitative, fundamental and technical analysis—to maximize profit potential and minimize risk.

    Product Features:
    • Model Portfolio
    • Intra Day Trade alerts
    • Access to Quant Ratings
    Real Money

    More than 30 investing pros with skin in the game give you actionable insight and investment ideas.

    Product Features:
    • Access to Jim Cramer's daily blog
    • Intraday commentary and news
    • Real-time trading forums
    Only $49.95
    14-Days Free
    14-Days Free
    GE $27.13 -4.10%
    INTC $27.92 -1.10%
    MSF $11.37 -0.79%
    XOM $77.94 -1.80%
    WMT $65.10 -1.00%


    Chart of I:DJI
    DOW 15,522.63 -392.11 -2.46%
    S&P 500 1,819.51 -32.35 -1.75%
    NASDAQ 4,238.3510 -45.2410 -1.06%

    Free Reports

    Top Rated Stocks Top Rated Funds Top Rated ETFs