najdorf

Not Likely to Be a Merry Xmas for Microsoft - RBC

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.