360 Degrees of Microsoft

Cody Willard and Rev Shark, among many others, examine the tech giant after its earnings report.
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Editor's Note: This special edition of "360 Degrees" examines Microsoft (MSFT) - Get Report.

Shares of the tech giant 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. For more on the basics, read

Microsoft Lost in Space.

Has the tech giant gotten too big to deliver meaningful growth, or has this pullback knocked it back to a reasonable valuation? The following is a sample of the expert commentary on the subject Friday on






has always believed that offering a wide variety of opinions and viewpoints -- rather than a monolithic "house view" -- helps readers make better-informed investment decisions.

"360 Degrees" is a feature that takes advantage of our stable of reporters and contributors, who will offer analysis of specific stocks from all angles -- fundamental vs. technical, short-term trader vs. long-term investor.

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Don't Miss Forest for the Trees at Microsoft, by Cody Willard

We all know that Vista got delayed and that, in 2006, every Xbox success is an earnings drag to Microsoft. How much will the delay, combined with what could be a full year with Xbox as the only new game console in the world, actually hit Microsoft's bottom line? The company has tried to quantify for us at about 15 cents per share of earnings on a consensus base earnings estimate of $1.50 or so. With those new estimates and the stock at $25, the P/E is about 17 instead of the 18 it was at yesterday.

But look, investing in Microsoft isn't about this quarter or next. You need to look at what's on deck in 2007. You have the Vista operating system rolling out to a world and Street that fully expects a slight incremental improvement on Windows XP.

You have an Xbox 360 system that will have sold millions upon millions of copies by the end of 2006. The losses from those systems will start to fade in 2007 as the costs drop. More importantly, the licensing for the games and the sales of the games themselves are going to hit the bottom line in 2007 and 2008.

In other words, it looks like 2007 and 2008 will show big, big earnings growth from this crusty ol' tech company. And I expect the stock to run into the $30s, then the $40s and, given that stocks usually overshoot to the upside just as they usually overshoot to the downside, why not be optimistic and look for a $50 price target in two years?

What does it mean that Microsoft is down $3 before the market's even open today? Well, perhaps it means that what might have been a burgeoning rotation into tech is already over. It might mean that some sort of short-term bottom can finally be put into tech. What I know for sure it means is that I'm aggressively buying Microsoft this morning and I plan to own it for another two or three years.

Too Much Love, by Michael Comeau

According to Capital IQ, over 1,500 institutions own Microsoft stock. Until these funds decide to substantially increase their stakes in Microsoft, or they get trillions in new money, this stock isn't going to $35, much less $50. I would love to see a list of major institutions that don't already have big stakes in Microsoft because I can't find any. And let's face it, this is a highly liquid stock -- it takes a ton of money to move it.

Plus, the stock is way too loved and over-followed with 29 buys, five holds, and one sell rating. The mechanics just don't add up to a buy here, though I'd certainly like to see another take on how the numbers could shape up over the next couple of years.

Microsoft's Prospects, By Steven Bulwa

I would not buy Microsoft here: The company has a huge uphill battle to fight. By achieving such greatness with Windows and basically becoming a monopoly, the market cap is an astronomical $250 billion. That is quite a base to start from -- how big should it be on 6 times revenues and 20 times earnings? Plus, the company will never again have a market to itself. In all its new markets, there are numerous nimble and worthy competitors. I believe it is all downhill from here.

At $50 Microsoft would sport a market cap of $500 billion. At the current 5 times revenues it would need to achieve revs of $100 billion to support that valuation. That is more than double today's number. When is that realistically going to happen? At the current growth rate of 11%, that could happen sometime in 2014 if the company is able to maintain it. The bigger a company gets, the tougher that becomes -- there aren't very many $100-billion-revenue tech companies. Lowly


(IBM) - Get Report

once a growth star, has almost $100 billion in revenues, yet curiously, its market cap is half of Microsoft's.

The Uses of a Benign Giant, by Rev Shark

Microsoft has been a rather benign giant for quite some time. It matters because Windows is still the heart of most computers, but it has not been a market-leading stock for awhile. In fact, Microsoft is still at the same price levels it first hit back at the end of 1998.

Nonetheless, because of its huge size and visibility, it has been considered a safe haven for conservative capital looking for long-term stability. The sharp dip this morning and the downgrades from analysts are going to shake the confidence of conservative investors who felt safe in the arms of the giant.

The question for us to contemplate this morning is whether this poor report is going to have broader, longer-lasting effects on the market, or this is just a healthy bloodletting that will lead to a reallocation into stocks other than Microsoft. Yes, Microsoft is still a giant, but it is an aging one, and like its brother giants such as

General Electric


General Motors

it is not necessarily indicative of broad market health.

Frankly, I didn't believe the Microsoft report was that terrible, and it doesn't deserve the hit it is taking this morning. However, a lot of folks were looking for big growth with the rollout of the new version of Windows and Xbox, and they're now questioning that hope. We are buying a little bit this morning for very long-term, small-sized, conservative client accounts.

Microsoft Finally Gets It, by James Altucher

A penny here or there on Microsoft's earnings last quarter is not that important in the long run (despite it being clearly important this morning to a lot of people). The story for Microsoft is 90% Vista and about 10% Xbox right now. Vista is a drastic improvement over XP. In the fourth quarter, we are going to see businesses doing a massive upgrade and in the first quarter, consumers (including me) will do the upgrade.

On Xbox, two anecdotal items I will mention. One, it just bought Massive, which places ads within video games. The ad market for video games is just beginning. It's like where keyword search was in 2002. This is going to be a bigger market than TV ads and Massive (now Microsoft) is the dominant player.

Second, the E3 video game convention begins next week. It's huge for gamers but difficult to get into, so everyone relies on bootleg videos of the event. Microsoft is letting people buy videos of it via the Xbox, building up great loyalty with their gamer constituents (thanks to Omid Malekan for pointing this out to me). I think for the first time ever, Microsoft "gets it" on a variety of levels. Today is a huge buying opportunity. Downside about $23 but I believe we will see $30+ by year-end.

Wait For It to Drop More, by Richard Suttmeier

There should be no rush to buy Microsoft. ValuEngine has it rated a hold with fair value at $27.92, which had been a great resistance level. With it below my quarterly pivot at $25.06, there should be a tradable bounce to back to that level. The long-term investor should be patient until the stock becomes 20% undervalued and that would be at $22.30, assuming that fair value does not decline. My semiannual value levels are $19.91 and $18.08.

The Advantage of Avoiding the Spotlight, by David Merkel

There's a real advantage to playing in the market where there is less attention, one of the main ideas about the (somewhat wonky)

article that I wrote on sell-side analyst coverage

, which is a good proxy for overall market interest. Smaller companies, with less trading volume, in nonsexy industries just do not get the attention of most people. Those companies are an expression of what happened "yesterday," and we want the companies of the future.

Both my insurance and broad market portfolios are inhabited largely by companies that are out of the spotlight; the stories don't tell so well. The glory days for earnings growth are often behind them, but they are sometimes priced as if they will never grow again, and that is the opportunity.

But Microsoft, because of its distinguished history and leader, is perpetually in the spotlight. As for Microsoft, my friend

Cody might be right

. All I can say is that for Microsoft to justify its current PE multiple, it has to get an earnings growth rate in the teens. If it can't do that, I'll just have to wait for the day when its price normalizes the PE down to a level that better discounts its growth prospects. If Microsoft grows its earnings at the rate it has for the past five years, the price it deserves today is somewhere below $20.

So, I sit on my stocks with a median PE of 10 or so, price-to-book of 1.8 times or so, and watch as good things happen away from the spotlight. It's a good place to be. It is a safe place, too.