Microsoft Investment Requires Too Much Patience - Barron's

Annotated article summary from this weekend's Barron's. Receive all our Barron's summaries by signing up here:

Yes, Microsoft Is a Growth Company by Eric J. Savitz

Summary: At its annual Financial Analyst Meeting Thursday, Microsoft (MSFT) CEO Steve Ballmer outlined seven areas in which he thinks the company can add $500M-plus in gross margin over the next three years: Corporate desktops, servers, MS Office for consumers/small business, OEM personal-computing, online advertising, Xbox 360 games accessories and services, and Windows Mobile devices. In particular, he stressed Microsoft's thrust into web advertising, and continued growth in the consumer electronic market. The Street is unconvinced. Goldman Sachs said last week that large-cap-growth mutual funds are very underweight MSFT: the average fund has a 1.23% stake, compared with a 3.3% Russell 1000 growth index rating. Some of the issues that worry analysts: 1) It was clear from the presentation that many of the growth prospects will take 5-10 years to bear fruit. 2) The company overspends ("nothing would delight analysts more than a nice big round of cost-cutting.") 3) The businesses MSFT says it's entering (e.g. advertising and consumer electronics) are far more cut-throat than its current mix. 4) Microsoft's focus on building internet infrastructure rather than building sites that bring in users is "backward." 5) Bill Gates's plan to pass control of product development to Ray Ozzie "will not be a smooth one." Bullish analysts say the company has gained operational clarity. Perhaps, Barron's Eric Savitz says, but investors won't likely have the patience to wait around.

Related Links: Microsoft F4Q07 Earnings Call Transcript • Is Internet Advertising Really Worth Billions? • Google vs. Microsoft: What's Going on Here? • Microsoft Lands 3-Year Digg Ad Deal

Comments

[Tom B:]

"Microsoft Investment Requires Too Much Patience"

Not to mention an unhealthy suspension of disbelief.

Sure, they can increase server sales to companies dumb enough to still be using Outlook/Exchange. Sure, they'll move lots of Vista, because customers have to specifically "opt-out" to still get XP. Sure, they'll sucker lots of third world chumps to act against their better interests in choosing "industry standard" Windows over something safer, faster, and more generally useful like Ubuntu LINUX, or, even better, OS X.

But Xbox will never make money, and it's already about 20B in the hole. Windows Mobile is a bad memory, with the iPhone about to start destroying the small marketshare WM currently enjoys. Office can't persist forever with Open Office offering roughly equivalent quality and superior interoperability at zero cost. The idea that MSFT will cut a large chunk of we ad revenue away from GOOG is ludicrous. Oh-- and the Zune? Expensive paperweight, that.

2007 Jul 30 09:30 AM