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Microsoft Lost in Space

Shares of Microsoft (MSFT - Get Report) tumbled more than 11% Friday, the stock's biggest single-day loss in about five years, as investors gave a thumbs-down to the company's heavy spending plans.

In recent trading, shares were off $3 to $24.25 with more than 450 million shares trading hands, seven times average volume. Earlier, the shares set a fresh 52-week low of $24 apiece.

"This could take the wind out of the stock for several quarters, maybe a year," said Kyle Flynn, an analyst with TCW Asset Management, which has a position in Microsoft. "Everyone was focused on near-term upside."

Indeed, investors and analysts have been positively drooling over the prospects of increased sales and earnings after the launch of Vista, the new versions of Windows and a raft of other products.

Goldman Sachs analyst Rick Sherlund, for example, wrote a number of notes supporting the stock in the last year, consistently making the point that the new product cycle, seen as the company strongest in years, would lead to a breakout of Microsoft's stagnant stock.

But on Thursday, Microsoft told investors that it is going to accelerate spending by some $2 billion in fiscal 2007 -- and live with the resulting decrease in margins and earnings per share.

After the company's disappointing top-line guidance, Sherlund said, "From an investor sentiment perspective, this is clearly a discouraging development, taking away from the anticipated excitement over the strong upcoming new product cycles in calendar 2007." Goldman Sachs has an investment-banking relationship with Microsoft.

To be sure, it wasn't hard to find investors and analysts who believe Microsoft is doing what is has to do.

"Fundamentally, it is the right way to run a business," said Stein Rowe analyst Chuck Jones. "It's probably a short-term negative and a long-term positive." In the absence of more details, however, "the jury will stay out," Jones said.

Microsoft's failure to signal the strategic shift, and worse, the lack of clarity on what the company will really spend the money on, made investors very nervous, said Mike Marzolf, a portfolio manager with Thrivent Financial.
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