Wall Street has provided plenty of drama for investors in the last few weeks. The
at 11,000, rocky quarters for
and other tech stalwarts, and last week's scary plunge on the
at bat late Thursday with its second-quarter results, you'd expect more thrills and chills.
Sorry about that. With the real action still a few quarters away, Microsoft's December quarter looks like it'll be more ho-hum than holy moly! That's because the quarter's worst news is probably already known -- the slower-than-expected launch of Xbox 360 -- and the opportunities for upside are fairly limited.
What's more, the launch of the next versions of Windows and Office, seen as major revenue drivers by Microsoft's bulls, are still months away.
Microsoft's stock has generally traded between $24 and $28 for the last three years. The underlying question is, of course, is there anything out there that will help the company blast its range-bound shares into higher territory?
Univest Wealth Management & Trust, which manages about $1 billion in assets, answered that one by selling off its position recently. "It's a boring stock; its growth days are behind," says portfolio manager Jim Fisher. And the launch of Vista, the new version of Windows, won't change that, he says. "Microsoft coming out with a new operating system doesn't generate the excitement it used to," he says, adding that the stock is still something of a safe haven.
Not everyone agrees with that bearish assessment, of course. UBS analyst Heather Bellini this week said, "Microsoft is the only company in our coverage universe that is expected to accelerate its revenue and earnings growth (pre stock-based compensation expenses) in 2006." She believes revenue will grow by 14% in calendar 2006, and that will, in turn, drive earnings and multiples.
Bellini figures the company's server and tools business, which generates about 25% of Microsoft's revenue, will benefit from November's launch of products including its SQL Server 2005 database. The client business, she says in a research note, will grow with the launch of Vista and the beginning of a new upgrade cycle. Her company has an investment banking relationship with Microsoft.
But as optimistic as she is in the longer run, Bellini is fairly cautious about the second quarter. Indeed, she is forecasting revenue of $11.8 billion, which is slightly below First Call's consensus of $11.9 billion (and earnings of 33 cents a share) due to headwinds caused by the strengthening dollar and lower shipments of Xbox 360.
When Microsoft launched the new game machine in late November, everybody figured it would be the hot gift of the season. Instead, the Xbox 360 turned out to be the hard-to-find gift of the season. Microsoft and its partners badly undershot demand, missing a chance to leap firmly ahead of
in the game-console business.
Microsoft CEO Steve Ballmer & Co. expected to sell between 2.75 million and 3 million units in the first 90 days after launch. The best data available so far -- a survey by NPD -- indicate that just 600,000 were sold at retail in the U.S. by the end of December. Microsoft has stopped reiterating its 90-day forecast, although a spokesman says it has not been withdrawn.
The company continues to repeat its earlier contention that it will ship 4.5 million to 5.5 million of the consoles by the time Microsoft's fiscal year ends in June.
Goldman Sachs analyst Rick Sherlund is also forecasting revenue below consensus, but like Bellini, he's rather bullish longer term. He says the stock's current valuation is "attractive" when the coming new product cycle is considered -- and when one notes that the cost of employee stock options are already built into Wall Street's estimates. His company has an investment banking relationship with Microsoft.
While some fretting investors may fear parallels with Intel's earnings disappointment, the chipmaker tripped on
its own lack of execution, not on a weak market for PCs. In fact, the market turned out to be stronger than expected, growing by nearly 15%, research firm IDC estimates. And that should be a positive for Microsoft's quarter, although stronger sales in foreign markets could translate into somewhat lower margins.
Ken Allen, an investment analyst with T. Rowe Price, which holds shares of Microsoft, says he is less interested in the second quarter's performance than he is in evidence of strength moving forward. If the company matches its own guidance, he says, that will represent revenue growth of 9% or 10%, which is better than its rate earlier in the year, and will be evidence that revenue is beginning to accelerate.
His advice: "Look for commentary on how March is coming along and get some early insight into 2007 as sales shift to Vista and the new version of Office." As for the Xbox problem, Allen figures that sales lost in the winter can be made up later in the year.