For nearly six months, investors in
have raptly followed the company's secret negotiations to settle an antitrust case brought by the government. On Wednesday, Wall Street turned its attention to a surprisingly overlooked issue: Making money.
Eight days before the company is scheduled to report its quarterly earnings, an influential analyst at
lowered his estimate for the company's quarterly revenues, citing a possible slump in demand for personal computers. Though no analysts changed their ratings on the stock, Microsoft shares plunged 4 5/8, or 5%, to 79 1/4 Wednesday afternoon, the lowest level since early summer. (Microsoft finished down 4 1/2, or 5.4%, to 79 3/8)
Analysts polled by
First Call/Thomson Financial
still expect earnings of 41 cents a diluted share, a number that has not changed since the company last reported earnings and spoke to analysts in a conference call on Jan. 18.
"Microsoft has been through a tough year on the legal front, but they've been perceived well on the fundamentals," said Chris Galvin, an analyst for
. Galvin rates the stock buy and his firm has done no underwriting for Microsoft.
And Jeff Maxick, an analyst for
, said: "People have remained concerned about the trial. It's the first bit of fundamentals news." Maxick rates the stock a buy, and his firm has not done underwriting for Microsoft.
And with Microsoft ready to release its third-quarter results, Wall Street has renewed its focus on fundamentals.
"There's just general weakness in technology," said Paul Dravis, analyst for
Banc of America Montgomery
. "Anything that sounds negative is going to produce an overreaction, which is what I think we have today." Dravis rates the stock a buy, and his firm has done no underwriting for Microsoft.
The simple fact that Rick G. Sherlund, the Goldman Sachs analyst, pointed to a potential problem with Microsoft's fundamentals was enough to move the company's stock, analysts said.
Sherlund issued a report Wednesday morning lowering revenue estimates to $5.75 billion from $5.95 billion.
Sherlund, who still rates the stock recommended and who did not return a call for comment, wrote that the change is based on "growing evidence that PC unit growth did not likely come up to our expectations."
That evidence amounted to "conversations with our hardware and component analysts."
Still, he noted that the company would not comment on the issue and that demand may have returned late in the quarter, which ended March 31. Sherlund wrote that the change implies about 2 cents a diluted share in earnings, but that he did not change his earnings estimate for the company's third quarter because the shortfall he anticipates "may likely be offset by gains in the investment portfolio." His earnings estimate is 41 cents, the same as the First Call consensus.
Microsoft is nearly as famous for its management of earnings expectations and ability to consistently surpass them as for its Windows operating software. Despite his discussions with PC industry analysts, even Sherlund concluded that his new revenue estimates "could easily be off $100 million either way."
The company declined to comment on the analyst's action or the stock price movement.
Microsoft's stock price fell into the 80s after U.S. District Judge Thomas Penfield, who is overseeing the Microsoft antitrust case,
ruled on April 3 that the company had violated the
Sherman Antitrust Act
by bundling its Internet Explorer browser with the Windows operating system. Other technology issues, as well as the overall
stock market, have been volatile since the ruling.
Previously, Microsoft's stock had been trading between the low 90s and low 110s since Nov. 5, when Judge Jackson issued a harsh preliminary
ruling against the company.
With a schedule set for hearings on remedies in the case, negotiations have broken off and news in the antitrust case has not been characterized by the kind of immediacy that can drastically move a stock price.
But Sherlund's negative comments raised the possibility of immediate problems on the earnings front, and that probably had an exaggerated effect on the stock, according to Maxick.
"The magnitude of his revenue change is really not that big," he said. "It's borderline immaterial rounding errors."
While some other analysts said they still expect revenues of $5.9 billion, Sherlund's reappraisal is hardly revolutionary. The firm
said in a report released Monday that it expected revenues of $5.8 billion.
If PC sales are slow, they have not thus far prompted earnings warnings from computer makers like
Even Sherlund could hardly portray his revision as news. Two days ago, he issued a report entitled "March quarter a bit soft?" Citing an expected increase in deferred revenues, the money that Microsoft makes from selling software but does not record until later quarters, Sherlund wrote that it was "unclear whether revenue might be light in the quarter."
The company does not receive royalty reports until the 15th of each month, Sherlund noted in the April 10 report, "so they are not likely to have a great handle on this issue."
If the company had received those reports (it still has not, according to Caroline Boren, a Microsoft spokeswoman) and shared the information with analysts (it would not, she said, because doing so would amount to selective disclosure), the information would still be difficult to interpret, analysts said.
For PC sales, "January and February were slow, March was strong," said Galvin, the Chase analyst. "Just looking at straight PC growth, that doesn't tell the whole story on a Microsoft quarter."