Not Likely to Be a Merry Xmas for Microsoft - RBC

The devastating U.S. financial crisis will hurt software giant Microsoft Corp.'s (MSFT) bottom line this holiday season as shoppers tighten their purse strings, RBC Capital Markets says.

“The challenging environment will weigh heavy on holiday PC purchases and consumer-centric products such as the Xbox,” RBC analyst Robert Breza said in a note released Monday before the markets started to crash as the $700-billion bailout package was voted down by the House of Representatives. Mr. Breza has reduced 2009 revenue estimates to $66.76 billion from $67.71 billion while lowering year-over-year growth expectations to 8.7% from 9.6%.

He has also lowered earnings per share estimates to $2.08 from $2.14 but would not be surprised if Microsoft made “larger moves with its repurchase that could help offset our expectations for slower top-line growth.”

RBC's current price target for Microsoft is $30 per share.

“We would expect to see a bailout plan by the [U.S.] government to stimulate the market but we believe it will take time for budgets and consumer spending to normalize and will remain constricted through year-end,” Mr. Breza said.

As part of RBC's downward revisions for Microsoft, the analysts also lowered estimates for 11 companies within the 23 they follow, noting CFOs across the board are lowering their budgets and taking a “defensive approach” to 2009.

Microsoft's price targets may be affected by competition from open-source software, piracy, antitrust litigation, government litigation or regulatory activity, product delays and supply shortages, among others.

All amounts are in US$

Comments

[papita:]

OH MY, LOOKS LIKE MSFT MIGHT DO 1/67TH LESS BUSINESS. I think everyone in America would settle for that. let's see, if my paycheck says I make $100,000/yr, this year I would make $98,508. Holy shit, the world is coming to an end, I can't eat steak anymore, can't buy my kids toys for Xmas. sorry fp, but the world is not coming to an end. buy when others are fearful, sell when they are greedy. someone said that somewhere.

2008 Sep 30 07:12 AM

[Respirate:]

Not much of a hit. They'll be fine. Good thing for Softie they have a captive market for that sorry-assed Vista.

2008 Sep 30 08:24 AM

[najdorf:]

The thing that's particularly funny about this sort of precise revenue/earnings prediction is that if you look back at the historical record most analysts aren't even close. Many of them just repeat company guidance or project past patterns into the future along with some made-up macroeconomic assessment. When they deviate from company guidance/historical trends, they don't typically improve the quality of predictions. When things go badly they tend to pile on negativity AFTER share prices decline. When a company develops something really great, they tend to pile on positively AFTER share prices rise. Look back at analyst reports on AAPL - "it sucks, it sucks, no one buys Macs..."; "OMG AAPL IS THE BEST EVAR BUY BUY BUY MAC IPOD IPHONE AAAAAHHH!!!"; "OMG AAPL is too expensive and no one will ever buy a Mac - sell it!" I doubt following any set of analyst recommendations on AAPL would beat buying and holding or buying in at a predetermined low point and selling at a predetermined high point.

No one knows better than people inside the company how much money the company will report in earnings in the next quarter. Given how strongly the market punishes earnings misses or revelations of accounting irregularities, companies have a pretty strong motivation to be accurate. They also release a huge amount of information quarterly. So what's the function of analysts?

All we really need for analysis is people on the short-side looking for companies that give misleading guidance, fudge the accounting, or commit fraud, shorting them, and publicizing their findings. Einhorn is worth 1000 "analysts" who upgrade and downgrade for foolish reasons. If a full report from the company doesn't tell you whether you want to invest, how is a layer of superficial analysis from some guy outside the company with no stake going to tell you?

All that's happening with MSFT is that multiples are compressing as it becomes a value stock rather than a growth stock. However, the company still has growth prospects (online, business software, gaming), and if you combine these with the excellent balance sheet, cash-flow, and shareholder focus (buybacks and dividends), the company probably will be worth more than today's price in the future. The only real risk is Ballmer pulling extremely stupid acquisitions, which I suppose is a significant risk, but no investment is perfect.

2008 Sep 30 09:07 AM

[Tom B:]

MSFT is the GM of the 21st century. In spite of yesterday's crash, I'm looking to Apple to beat MSFT market cap by September 2009. Assuming, of course, we don't fall into a 1930's depression.

2008 Sep 30 09:55 AM

[Jonha's Pop:]

Mr Papita. I could not have said it better or more clearly. The "analysis" of Mr. Breza, would seem to indicate, he has way too much time on his hands.

2008 Sep 30 10:03 AM

[jaume ribe,...:]

I find it another ridiculous comment, even though it can be true, within the legion of speculative thinkers/ forecasters, most of the time wrong, to try to concern to the holders of something real like a Microsoft share, unbeatable leader of software worlwide, precisely pointing as non positive a share repurchase of 40 billions on its way. In any case the headline is what makes the "note" to strive that qualification

2008 Sep 30 11:24 AM

[short WFC:]

msft balance sheet already looking like a fat ass cash cow will absolutely shine compared with the the mounting debt mountains all around

2008 Sep 30 12:49 PM

[User 125474:]

mark deaton and supermax trader is a fraud

2008 Sep 30 10:18 PM