Microsoft Bulls Still Play Waiting Game

Updated from 7:01 a.m. EDT

A raft of legal settlements, steady quarterly sales growth and the likelihood of higher dividends have thus far failed to breathe life back into Microsoft's (MSFT Quote) stock. The tech bellwether's stock has traded virtually flat from a year ago, as the Goldman Sachs Software Index gained 41.7%, and the Nasdaq Composite jumped 38.9%.

So what will it take to revive shares of the world's largest software maker? Investors looking for answers in Thursday's third-quarter earnings report may be disappointed.

"I think it will be an in-line quarter," said Tony Ursillo, an analyst with Loomis Sayles & Co., which has pared back its Microsoft holdings this year. "I think there are better opportunities within the tech sector, based on growth prospects.

"I don't see a lot of catalysts," Ursillo added. "I don't see meaningful benefit from various legal settlements [or] a lot of leverage to the economy and ... I think the hype around a dividend increase is overblown."

Microsoft stock was recently up 34 cents, or 1.3%, to $25.79, but Wall Street has largely ignored the firm's historic settlement with archrival Sun Microsystems(SUNW Quote) and a smaller legal agreement with privately held InterTrust. Even record quarterly sales of more than $10 billion earlier this year failed to woo Wall Street.

But Microsoft bulls cite a number of potential catalysts, although some are more than a year away:

A rebound in Microsoft's declining unearned revenue, expected in the current quarter.

Action on the software titan's massive $53 billion cash hoard. Microsoft has said it would discuss a dividend increase at its annual analyst day meeting, scheduled for July 29.

New products. But Microsoft's next release of its SQL Server database, called Yukon, has just been delayed to 2005; and the widespread release of its next operating system, dubbed Longhorn, is not expected until 2006.

Expecting a Rebound

Microsoft's unearned revenue -- a measure of Microsoft's subscription sales -- will likely be the most closely watched metric Thursday, as has been the case in recent quarters.

Unearned revenue is expected to continue its slide in the just-completed third quarter and then begin to rise again in the June quarter. And just the discussion of unearned revenue improvement during Microsoft's conference call Thursday evening could help the stock, suggested Pat Adams, chief investment officer at Choice Funds, which holds Microsoft shares.