Will the Court Set Microsoft's Shares Free?

For the first time in a long time, everything is going Microsoft's(MSFT Quote - Cramer on MSFT - Stock Picks) way. But its stock on Thursday was hardly going any way at all.

With good business and stock momentum so far this year, the software giant Thursday looked like its old self, hosting a global kickoff party slated for more than 100 different cities to celebrate the launch of its Office XP software, the next generation of its ubiquitous package of "productivity" products. Bill Gates, live from New York City, led the charge.

All of that hoopla was a mere prelude to what's set to come from Microsoft later this year, including a major launch of the next generation of its operating system, Windows XP, in October, and the birth of Xbox, the company's much-anticipated gaming console, due out in November. Other positives, such as 100 million subscribers to its free email services and No. 2 status of its MSN Internet service, are also bolstering bulls.

Yet despite the fact that Microsoft's well-oiled hype machine was humming on high, the company's stock was merely drifting along. After opening lower, the stock rose to $70.39, up 1.7%, before fading again. It closed off a penny, at $69.18. Not much of a one-day return for the millions in marketing that Microsoft has put behind Office XP's release.

Of course, the ultimate effect of Office XP will be measured over months and even years. Many Wall Street types were debating Thursday how significant XP's near-term effects would be because cool new features in the product might not be enough to inspire widespread purchases.

But the stock's action Thursday may have had less to do with Office XP, and more to do with its ongoing courtroom drama. While Microsoft's bulls have been glad to focus once again on all the new products coming out of the company this year, a quieter camp on Wall Street hasn't forgotten that Microsoft's antitrust battle with the government isn't over yet. And the market, as it demonstrated during the election aftermath, does not like indecision.

"With the uncertainty of what's going to come out of the courts, those problems restrict the stock from reflecting all of the positives going on at the company," says Tim Gaumer, a portfolio manager at Transamerica Premier Mutual Funds, which holds Microsoft shares. "Once we get those problems behind us, we can focus on all the business changes."

A decision about the company's appeal in the case is due out any time, possibly Friday, given the fact that the U.S. Court of Appeals releases opinions on Tuesdays and Fridays at 10 a.m. EDT. Most experts watching the case now say there's almost no possibility that the company will be split up, as was originally proposed by the trial court. But they also see as slim the possibility that Microsoft will succeed in having the ruling overturned entirely. Instead, the middle-ground consensus is that less severe "remedies," such as limiting the way Microsoft conducts its business, could still be imposed.

And the case could get sent back to the lower court and be dragged out again, albeit to much less of a tooth-pulling degree.

Not that Microsoft's stock, to this point, has had much of a problem reflecting the company's newfound business momentum. Since the beginning of the year, the stock is up more than 60%, making it the best performer of the 30 stocks that make up the Dow for 2001, and by far one of the best-performing tech stocks to date this year. It silenced its doubters last month when it beat downwardly revised earnings estimates, turning in an EPS number that was in line with Wall Street's original consensus estimates for the company.

And despite those gains, many analysts and investors think the stock could easily continue to rise and reach prices in the high $80s to mid-$90s.

"I don't think anything's holding the stock back. I certainly don't think there's a cloud hanging over the stock because of the trial, " says Melissa Eisenstat, an analyst at CIBC World Markets who rates Microsoft a buy and maintains a 12-month price target of $85 on the stock. But she acknowledges that "certainly, if there's legal news of any kind, the stock will react, as it has every other time." (Her firm hasn't done underwriting for the company.)

Her focus, at this point, is on the business page of the two-sided story surrounding Microsoft's shares.

"If the second half of the calendar year is decent for them because of new consumer products, strong business purchases, and if the economy comes back, that should give them what they need in their business," Eisenstat says.

In that light, there may be little standing in the way of Microsoft's business. But it sure would be nice if the stock could remove the risk of another prolonged legal drama, however remote.