The earnings news out of Microsoft (MSFT) yesterday, April 22, after the stock market close in New York, was good but good isn’t getting investors very excited these days. Unless a company delivers great earnings and ups guidance as well, shares have been selling off on just good news this quarter.
That’s the way this market is expressing its nervousness about the Greek debt crisis, monetary tightening in China, and the uncertainties of Wall Street reform during this earnings season.
And so Microsoft shares dipped on its earnings report in the market’s after-hours session and were up just a nickel on the open in New York even though the company is growing just the way that investors in the stock, a Jubak’s Pick in July 2009, had hoped.
Revenue for the company’s third quarter of fiscal 2010 (Microsoft’s fiscal year begins on July 1) grew to $19 billon as sales of Windows 7, Microsoft’s new operating system, produced a 29% increase in revenue for the Windows business unit. Most of that growth came from consumers with unit sales of Windows to corporate customers flat from the year-earlier quarter. That wasn’t unexpected. Microsoft has repeatedly said that it doesn’t expect corporate sales to kick in until the second half of 2010 and early 2011. So that piece of the Windows 7 good news story is still in the pipeline.
 The company’s other units posted just so-so results. Revenues in the Server unit grew by just 2%. In the Business software unit revenue actually fell by 3% as corporate customers put off some purchases of Microsoft’s Office software ahead of the release of Office 2010.
At the bottom line, where revenue turns into earnings, the story was about lower operating expenses. Nothing captures Microsoft’s transition from a growth rabbit to a growth tortoise—slow and steady, remember, wins the race—better than investors’ newly discovered concern with expenses at Microsoft. So while earnings of 45 cents a share, which exceeded Wall Street estimates by 3 cents a share, still count, many analysts led their reaction to the company’s quarter by noting that Microsoft had said that operating expenses for the company’s full fiscal year would come in $100 million to $200 million lower than previously projected by the company. That should help keep gross margins near the 81% announced for the third quarter. (Wall Street had estimated gross margins of 78.9%.)
All in all, I think the Microsoft story remains on track—no surprises in this quarter to either the upside or downside. I’m going to tweak my target price just a little to reflect the company’s higher margins but that’s it. As of April 23, I’m raising my target price to $37 a share by October from the previous $36.
Full disclosure: I own shares of Microsoft in my personal portfolio.
The Kin will probably sell just about as well as the Zune. They have blown it in the mobile market with typical bloatware that freezes up and hogs memory. What kid is going to say I want a Kin instead of an Iphone? Not one that I know.
With MSFT stock it is important to remember that in order to maintain cashflow they literally HAVE to get a huge buyin to windows 7 and new office ad infinitum. They are not coming out with anything new that sticks so where is the growth going to come from? MSFT is essentially dead money even though people have bid the stock up recently. Get out while you can and buy someone who brings out new products that people want. Why allocate money here when there are so many other options?
off topic to creativekev:
I hope you didn’t sell your AAPL last week as we discussed. I had another thought concerning what Apple might be cooking up in terms of product introductions. Netflix over $100? I bet that won’t go unheeded in Cupertino! …and remember the big Cisco announcement that turned into a non-event for consumers? Could Apple be approaching the arena that some people were expecting from Cisco? I imagine that the iPad could be easily integrated to function with a new wireless ‘Apple TV’ appliance! The appliance might potentially serve multiple iPads and/or display clients so each ‘consumer’ in a household could watch whatever (previously downloaded, considering today’s network capacities) video program content that pleases them. And of course it would further expand the breadth and relevance of iTunes and probably support Apple’s apparent drive to serve, share profits in, and potentially inject advertising into web content. It sounds like a teenager’s dream, and IS PURE SPECULATION – but would fit with my thesis of generating profits by integrating across the platform of various Apple toys.
Hi Jim,
In your MSFT review you wrote “Unless a company delivers great earnings and ups guidance as well, shares have been selling off on just good news this quarter.” I have seen this pattern with other stocks too. The last time I saw this pattern, *I think*, was a little while before the tech bubble burst.
Is this pattern typically a presage of a correction? If so, how widespread is it currently?
Semievolved,
Besides what marr.bo said I would add that when Vista first came out it was very buggy, and even though they have fixed most of those problems, the public once it sours on something, just isn’t going to forget. Windows 7 is much more efficient then Vista, but even more then that, just because it isn’t called Vista helps from a perspective point of view.
BTW from a business side I don’t even think that many people are in love with Windows 7. It goes more like this. There isn’t that much in Windows 7 that compels a company to want it over Windows XP, but because of delaying of upgrading of machines, and avoiding Vista (because it was seen as step back in performing the jobs they needed done), it is getting to the point that the IT support people are starting to worry how much longer Microsoft will support Windows XP. So any OS that is at least as good as Windows XP, and is supported, will at least be put on any new machines they have bought.
Jim,
What is the rational for SLB pricing? They reported a 28% decline in earnings to 672 million and revenue fell 7% to 5.6 billion but the stock price jumped from about $68 to about $73. What’s missing from this story?
Jim,
It’ll be interesting to see the impact of Microsoft’s Kin “social phones”, cell phones that make it easier to see and post social networking updates, for the social-network-active consumer. These Kin phones come out in May. As an AAPL investor, I’m somewhat concerned about:
(1) Microsoft saying their marketing campaign for the launch of Kin next month will be massive and rival anything anyone has done.
(2) These seem to target consumers wanting a simpler, streamlined, dedicated social-networking wireless device that is not complex to use. ‘Simple and streamlined’ is why AAPL products are appealing. Could MSFT be finally getting it?
On the other hand, Kin phones won’t (initially, anyway) have nearly the apps to match iPhone. The quality of the MS OS on it is also uncertain.
Should be interesting to see if Kin gains traction in the smartphone wars.
Jim,
Off topic but current event.
How will the recent explosion and sinking of Transocean’s Gulf oil rig affect the stock? Will this spook investors in deep water drilling? Some of these deep water rigs cost upwards of a billion $ so sinking one could have a significant financial impact totally apart from the costs of spill clean up and the legal liabilities of loss of life and environmental pollution. Thanks for any help you can give on this.
Semievolved,
Vista chokes the memory in most systems, especially lap tops. Vista involves a lot of intensive graphics processing and expensive kernel operations. On top of this, memory access time is now the bottleneck to computer performance, so wait a while until you load your laptops with lots of applications, it’ll bog down, and you’ll need to max out your main memory capacity to get it to run decently.
Jim, thanks for the article. Microsoft isn’t the amazing growth story anymore like google, apple have the chance to still be, or other companies with good mobile device plays, but definitely a good bet in a turbulent economy.
Way off topic, but does it bother anyone else that that misspelling in the Global Basecamps ad has remained uncorrected for months and months now?
Sold MSFT last year, did OK. The meager dividend turned me off.
Sort of oblique topic but what is the complaint with Vista? I used XP Pro for years happily and put off upgrading PC for fear of Vista. I finally did upgrade my PC and wife’s laptop and they both came with Vista. Other than the initial period of getting used to some minor differences, we haven’t had problems.
We haven’t had crashes or any other problems and I am wondering what is it about Vista that raises such disdain in others who are clearly more discerning or demanding of their OS????
Jim,
I will second everything you said. Mr. Softie is still my favorite of the tech plays right now.
I will add that, as an owner of the Windows 7 software, I am quite pleased with it, and I fully expect all those companies putting off upgrades during the Vista fiasco will be buying this new O/S. Microsoft’s projections will be at least close, assuming they don’t exceed them significantly.
I will also point out that I got the new Office 2010 Beta, and so far so good. It does need some tweaking, but it works about as well as previous Office versions.