Monday, May 15, 2006

Microsoft's Unfathomable Share Price
Running Out Of Ideas

For the many investors who follow Microsoft's share price, it must have been a mind boggling 5 months. US equity prices have performed well for the first 5 months of 2006. Microsoft started the year just above US$30 and reached a high of about US$36 mid-Jan and have ben dawdling and dwindling all the way to US$23 in May.... what gives?

Microsoft is almost the exemplary company. Its got value in terms of dividends and dividend yield, the company pays a 36 cents a share annual dividend. To give back value to shareholders and raising EPS, the company is executing a US$30 billion stock buyback program. Core business units are still growing albeit in single digits. The company is also not backing down on R&D, it plans to spend US$2 billion in new investments in fiscal 07. Microsft has also risen in growth areas such as web advertising. It continues to reward employees with a combination of stock and cash bonuses. So why isn't the stock price performing better?

Possible Reasons:
1) Market does not agree with company strategy. Even though Microsoft is doing all the growth / value strategies by the book, if investors are not convinced of the company's strategy going forward, that's it, no point holding.
2) What Gates and Ballmer has failed to recognise is that big investors see Microsoft as the defending / returning champion for the longest time. Its ability and stature depends on staying number one. If the big investors CANNOT envision Microsoft staying at #1 in 1,2, 3 years down the road, that's it. Hence Gates and Ballmer must read more into the share price movements - the big investors are saying your #1 days are numbered.
3) While management can harp on growth and value factors, it seems investors are very concerned still with Microsoft's ability to deal with Google and the overall trend of giving in to Europe's regulatory trustbusters.
4) This also means that investors are NOT willing to pay for the monopolies of Windows and Office anymore even though it keeps generating free cash of US$1 billion a month.
5) This also means their web strategy is not making sense to investors no matter how loud Ballmer yells.

I guess, to push the share price to US$50, I have a good strategy for Microsoft. Go and use the excess cash and buy a substantial stake in Google.... and how was your day?

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