Shares Unlikely to Drop or Climb Much Soon
NEW YORK — Investors who are afraid of a Microsoft breakup have fled the stock already, slashing its value by more than one-third since December. So the risk seems slight that it will fall much further in the short term, many analysts said Wednesday.
But neither are the shares likely to zoom upward any time soon, as Judge Thomas Penfield Jackson’s ruling did nothing to lift the uncertainty weighing on investors’ minds.
That uncertainty is reflected in the wide range of opinions among analysts about where Microsoft will trade a year from now, assuming the case is still under appeal.
Recent one-year price targets from analysts range from $80 to $140, with a median of $105, according to First Call Corp., which tracks estimates. The shares closed up 88 cents at $70.50 in Nasdaq trading Wednesday. They have fallen 41% from their record high of $119.94 reached late last year.
Many analysts still like the stock, though their enthusiasm has waned slightly since January.
The average analyst rating for Microsoft in a First Call survey is 1.7, with a 1.0 being a “strong buy†and a 2.0 being a “buy.†The stock was briefly at 1.5 in January.
The consensus on Wall Street is that the company probably will prevail on appeal and avoid the breakup ordered by Jackson and sought by U.S. antitrust officials.
“If you really think it’s going to be broken up, you probably ought to just go away for a while,†analyst Andrew C. Brosseau of S.G. Cowen in Boston said Wednesday.
One of the major unknowns about Microsoft’s near-term future is what kind of operating restrictions the court may place on it during the estimated 18 months that the appeal will take, analysts said.
Those restrictions could, conceivably, hobble the company’s earnings potential.
Even if the restrictions aren’t especially onerous, Microsoft’s fundamentals aren’t so rosy, Brosseau argues. Its core products--word processing and spreadsheet software and desktop computer operating systems--are “buggy-whip businesses,†he said.
There is far greater growth potential in Internet applications, but Microsoft has no competitive advantage there. Moreover, given the firm’s antitrust problems, few expect it to be allowed to use its desktop clout to develop such an advantage.
Thomas Rath, who watches the stock for Seattle-based Safeco Asset Management, worries that the antitrust cloud could leave company managers “second-guessing every move they make, like IBM in the 1980s,†when the big computer maker was under an antitrust consent decree.
But Rath’s colleague, William B. Whitlow, portfolio manager of a Safeco mutual fund that concentrates on companies based in the Northwest, said he has no intention of selling any of his Microsoft shares, which make up 5% of the fund’s assets.
Recognizing its problems, Microsoft recently said it expects slower growth in revenue and profit in the near term. Analysts’ consensus earnings estimate for the fiscal year ending June 30 is $1.69 a share, according to Zacks Investment Research. For fiscal 2001, analysts expect $1.87 a share--an increase of 11% from this year’s estimate. That’s far below the firm’s growth of recent years.
But analyst James D. Ragan of Crowell Weedon & Co. in Los Angeles noted that Microsoft is known for consistently beating expectations. He is generally positive on the stock’s prospects, saying that the firm is in a “robust product cycle,†led by the new Windows 2000 operating system.
What you get for $70.50 a share, analysts say, is the leading personal-computer software company priced at 42 times this year’s estimated earnings per share--and holding about $8 a share in cash and securities on its balance sheet.
But the larger question if the company ultimately is broken up--whether the parts would be worth more than the whole--remains anyone’s guess.
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Microsoft, by the Numbers
The software giant has been one of the most profitable U.S. companies, and its earnings in the last decade have allowed it to amass a huge financial war chest. Some key numbers for Microsoft: Estimated sales: $23 billion
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Estimated earnings: $9 billion
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Balance sheet, as of March 31:
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Stocks and other equity investments owned: $21.3 billion
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Cash and short-term securities: $21.2 billion
Sources: Microsoft, Zacks Investment Researach
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