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 (NASDAQ: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.