Forget the Courtroom History, Check Microsoft's Fundamentals
The way you felt about
Microsoft
(MSFT) - Get Report
then is the way you feel about Microsoft now. Trust us. We know.
Despite the undeniable sense that Thursday was a
landmark day for the company and the country, as an investment, things for Microsoft really haven't changed too much. Most analysts expected Judge Thomas Penfield Jackson's breakup remedy to be largely nullified, as it was. And while Microsoft being
branded as a big, bullying illegal monopolist, once and for all, is unfortunate for the company, we all already knew that.
On the downside, its enemies will now be able to wave the illegal monopolist banner fervently for all the world -- and the courts -- to see, something that could be a prelude to years of civil suits against it. But even so, the court set a high hurdle of proof that Microsoft has done actual harm to consumers.
Perhaps for these reasons and others, Microsoft's stock did little but yawn on Friday, jumping up to $73.41 before beginning a midday fade. Lately, it was at $72.16, down 58 cents, or 0.8% from its Thursday close. For the week, which saw a quarter-point rate cut from the
Fed
, it's up 4.5%.
"I think you get a short-term pop because the breakup's not there, and some of that probably was not priced into it," says Aaron Scott, an analyst at
Tucker Anthony Sutro
who has a buy rating on the stock. "So you get a short-term pop, but then it comes back down again. The hard facts are that Microsoft is a decent company with good financials and a strong product pipeline, but its growth rate is in the single digits right now." (His firm hasn't done underwriting for Microsoft.)
If Microsoft delivers the 42 cents a share in earnings that analysts are expecting when it reports fiscal fourth quarter results July 17, the company will earn $1.79 a share for its 2001 fiscal year. That's just a 4.6% increase over the $1.71 a share that it earned for fiscal 2000. For fiscal 2002, analysts polled by
Thomson Financial/First Call
project the company to earn $1.94 a share, which would represent a more respectable, but still single-digit earnings growth rate of 8.3%.
With its stock trading at 37 times fiscal 2002 earnings, investors are paying a meaningful premium for the shares.
Still, this is Microsoft. This is the company, or more accurately, the stock, that has made untold numbers of Wall Street money managers look smart, time and time again. Over the years, when times were tough or when they weren't, Microsoft more often than not has been a good bet. Funny how maintaining a monopoly illegally can help a company do that.
And with Microsoft's rollout later this year of
Windows XP
, the latest offspring of that operating-system monopoly, along with its video-game console
Xbox
, its
.Net
Internet software-as-service push, as well as its
Hailstorm
and
Passport
initiatives, the company will have plenty to crow about going forward.
But you already knew all of that, which is why -- again -- that you really don't feel that much different today than before. Doesn't matter if you're a bull or a bear. This hasn't really changed how you look at the stock, other than removing a question mark from the end of your analysis.
"I think it's still a good time to buy Microsoft; we haven't done anything with our position, we still own it," says longtime Microsoft bull Tim Gaumer, a portfolio manager at
Transamerica Premier Mutual Funds
. "I think it clears up a lot of uncertainty, but the case developed pretty much as we expected it to."
For investors like Gaumer, there is still upside in Microsoft's shares, despite the fact that they're up more than 71% since last December, when the company arguably looked doomed. But in the end, the company will have to perform on the same basis as any other company, increasing its sales and earnings, doing its best to deal with the vagaries of this difficult economy. And some would go so far as to argue that the company's monopoly in Windows doesn't give it as much of a leg up as it used to, especially because what's important in technology has changed so fast.
"Look, the importance of this case is decreasing as time goes on," says Melissa Eisenstat, an analyst at
CIBC World Markets
who rates Microsoft a buy. "The software marketplace has accomplished what they were trying to do, which is to lessen Microsoft's importance in the grand scheme of things. They're in the Internet, and they're in enterprise software -- Microsoft is playing in those areas aggressively. But they are by no means the top dog there like they are with the operating system." (Her firm hasn't done underwriting for Microsoft.)
Microsoft's critics would almost surely and heartily disagree with that view, as they always have. And its supporters will take their predictable stance.
"Because this ruling is so closely aligned with expectations, people are going to focus on the fundamentals going forward," says James Lucier, Washington, D.C., analyst for
Prudential Securities
, which has a buy rating on the stock. "There will be questions about does XP work, how well are they going to do on the Xbox, what kind of growth are they going to show us."
In other words, welcome back, Microsoft. You're the same as you always were.