It's time to rush
to the hospital for rabies shots.
After quarter upon quarter of Microsoft executives telling analysts that it might not be able to maintain its awesome growth rate, its third-quarter results released at the end of last week finally made good on that promise. Microsoft reported revenue of $5.66 billion, missing analysts' estimates of $5.95 billion. The company also took the dramatic step of telling the world that revenue will grow only around 15% in 2001, more than 5 percentage points below what many on Wall Street had been expecting. Couple that with
Wall Street Journal
reports that the
Department of Justice
is seriously considering splitting up Microsoft and it was a watershed bad day for the software maker.
"Microsoft has been known to be cautious. It's been viewed as the boy crying wolf a little bit," says Andrew Roskill regarding Microsoft's habit of fretting about its earnings outlook. Roskill, the director of software research at
Warburg Dillon Read
, which has no banking affiliation with the software power, warns that it's finally time to believe. "What's different this quarter is they didn't just issue usual gloom and doom, they revised estimates downward."
And the wolves pounced.
Two weeks ago,
guru Rick Sherlund warned that he thought Microsoft would be bitten by slowing PC sales. Monday, he backed that up by kicking Microsoft off Goldman Sach's Recommend List, pegging the stock at market outperform and saying that due to the disappointing earnings-per-share growth, Microsoft's growth this year may likely remain below trendline growth rates. He cautioned that the corporate PC market may not be good enough to sustain Microsoft in the future, but also noted that Microsoft's revised 2001 numbers may be too low.
Sherlund was joined in downgrade fervor by David Readerman at
Thomas Weisel Partners
, who dropped the stock from a buy to a market perform rating. Thomas Weisel Partners hasn't done banking with Microsoft, while Sherlund helped shepherd the
maker to the public markets when it was just a pup.
Other analysts stood firm with their buy and strong-buy ratings, insisting the corporate PC sales slowdown that pinched Microsoft in this third quarter has already eased up, with March sales edging higher. Nonetheless, even the Microsoft optimists thought it was time to lower their stock price objectives. Merrill Lynch maintained its accumulate rating but dropped its price target to 87. Microsoft fell to $66 1/8 midday.
While Warburg Dillon Read's Roskill assures us that Microsoft is still "an industry gorilla," he doesn't see it as a gorilla going anywhere soon. "This is the first quarter I can recall that they've lowered guidance. Between that and the Department of Justice lawsuit, it's safe to say the stock is probably going to stay in a trading range for the next couple of months."
release and its mighty push into the business-to-business server space, Microsoft seems to finally have tripped up. As Readerman says in a Monday research note, "The Microsoft operating model has now slowed. As a long-time Microsoft analyst, and having attended many analyst calls and meetings expressing caution, this time, I now believe you."
Now, it's time to fend off the wolf.
Tish Williams' column takes at look at the people who make Silicon Valley tick. In keeping with TSC's editorial policy, she doesn't own or short individual stocks, although she does own stock options in TheStreet.com. She also doesn't invest in hedge funds or other private investment partnerships. She breathlessly awaits your feedback at