Wall Street speaks -- the days of Microsoft growth are over
7/24/2010 11:49:00 AM
kenmouse
, Posted in
Yesterday, Microsoft reported record revenue and massive earnings, in what must be considered a blowout fourth quarter at a time when the country remains in the economic doldrums. Today, its stock price dropped. What gives? Wall Street has spoken: It believes the days of big growth at the company are over.The fourth-quarter news for Microsoft is about as good as it gets. Its revenue was $16.04 billion, a 22% increase over the fourth quarter last year. It had a net income of $5.93 billion, an increase of 49% compared to a year ago.
And yet, as I write this, even though the overall stock market is up slightly today, Microsoft's stock price is down .36, to $25.48, a 1.47% drop. It's hard to imagine Microsoft reporting better financial results than yesterday's, but that still doesn't satisfy Wall Street. Microsoft's stock price has remained at the same level for years, even as revenue has ballooned.
As I wrote in my blog, Is Microsoft stock suffering from a "Ballmer discount"?, some people attribute the problem to Steve Ballmer's lack of vision for the company.
But it's unlikely that tells the whole story. As Don Dodge points out in his blog, when Wall Street considers what a stock should be worth, it's looking to the future, not the past. It wants one thing, above all: growth. And it prices growth stocks differently than stocks it considers Blue Chip stocks --- stocks from stable companies that deliver reliable revenue, and sizable dividends.
His conclusion: Wall Street considers Microsoft a Blue Chip stock, not a growth stock, and the stock is priced accordingly. Dodge warns:
Wall Street has concluded that MSFT is a Blue Chip, and hasn't changed its mind in 10 years. Microsoft is still investing and acting like it is a growth company. Something has got to change. Don't bet on Wall Street changing. Your move Microsoft.
Now, it must be said that Dodge isn't a disinterested observer --- he works at Google. So you may want to discount what he has to say. I wouldn't, though. Even though he works at Microsoft's chief competition, he has some good points. Microsoft has fallen behind in every important growth area, notably Internet search and mobile computing. Windows, Office, and similar products simply can't deliver the kind of high growth that search and mobile computing can deliver.
I don't believe, though, that it's time for Microsoft to throw in the towel and accept its growth days are over. The mobile market is certainly volatile enough that Microsoft could catch up there. And although it is unlikely to ever catch Google in Internet services and search, Microsoft can still grab a good-sized slice of the market there.
To do that, though, it needs to cut down on political in-fighting and turf wars, and once again inculcate a sense of urgency and innovation throughout the company. If it doesn't do that, then it's true that its big growth days are behind it.
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