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 posted Monday, December 25, 2000

Microsoft bashers may give their glee a break, because price is right

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They say that when it comes to money, you shouldn't wear your heart on your sleeve -- that's in spending, saving, betting or investing. And yet, every time I check the stock listings, the price of Microsoft Corp. keeps jumping off the page, chiding me to at least take a look.

It appears I'm not alone.

With its price down more than 60 percent from the year's high, Microsoft is getting a microscopic look from lots of stock analysts and investors. And with a Bush administration headed to the White House, concerns about the landmark federal antitrust ruling against the software giant might be subsiding somewhat.

Just a year ago, Microsoft was riding high at nearly $120 a share and convinced it ruled the world. But the stock this past week dipped near $40 a share -- its Friday closing was up $3, to $46.44 -- investors are looking at the likelihood for more of an upside than downside for shares of Microsoft. Yet the gusto seems to have been lost somewhat in the headiness of the stock.

Take Microsoft's shocking news on Dec. 14. The software maker that day warned that its fourth-quarter profits would fall short of estimates, sending investors running for the exits and pushing the stock down more than 11 percent. And as one of the 30 Dow Jones industrial average stocks, Microsoft's fall sent the Dow down 240 points, or 2.3 percent, for the day.

Even for a stock that has a history of lowballing estimates and then coming out and doing better than expectations, the warning by Microsoft was notable. But is the mid-$40s for the darling of this high-tech stock world the bottom?

"It should be pretty close to the floor, but that's a pretty tough call to make," said P. Raghavendra Rau, a finance professor at Purdue University's Krannert School of Management. "The stock market sometimes takes its time in sorting all that out. There may be some overshooting."

For a long time, Microsoft had been able to manage expectations properly and dominate in a world that survived solely because of its link to the mighty software giant. But with a personal computer market in the throes of a correction, not even Microsoft is escaping unscathed.

In its alert, Microsoft said it now expects revenue to come in at $6.4 billion to $6.5 billion for its fiscal second quarter, with earnings of 46 cents or 47 cents per share. Total 2001 numbers also were adjusted, with revenue projected at $25.2 billion to $25.4 billion, and earnings of $1.80-$1.82 a share. Analysts were expecting earnings of $1.91 a share for fiscal 2001.

According to Dan Briody, of the high-tech stock newsletter Redherring.com, Microsoft's rare warning, coupled with the success of competitor Oracle Corp., underscores a much more important realization about Microsoft -- that it's still a PC-oriented company.

"No matter how much Microsoft wants you to think it's about the back office, its heart and soul -- and the majority of its revenues -- are still tied up in the foundering PC market," Briody says.

Nearly 71 percent of Microsoft's revenues come from its PC business, including operating systems. Of that, between 35 percent and 40 percent of its revenue come from Microsoft Office sales. A potential help: Microsoft plans to roll out .Net, its Internet-based software platform, in 2001.

"The company is maturing," said Aaron Scott, a stock analyst at Tucker Anthony Capital Markets. "The next wave of growth will come from the server side, with Windows 2000, but we need to see how they are doing with that in the longer term. And another big question is whether Microsoft .Net will surface to be a killer app."

All is not bad. The PC industry is still expected to ship close to 100 million units in 2001, and with margins as high as 90 percent on some of its desktop software and operating systems businesses, Microsoft will continue to generate huge profits for years to come.

But observers like Rau and Briody think the market has embraced the new Microsoft. And though the market is content with Microsoft's prospects, the investor euphoria has started to reach more realistic proportions.

"It's always important to note that it's not like the business is shrinking," says industry analyst Dwight Davis with Summit Strategies in Kirkland, Wash. "It's just that the growth rates aren't as high as they had hoped."

But at $46.44 a share? Even the Microsoft haters may be forced to sell their soul this holiday season and make a wager on the software giant. After all, how much cheaper can it get?


Fiorini is the local editor. He can be reached by calling (765) 420-523.


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