Thursday, October 05, 2006

Microsoft's Stock Recovery

Interesting post today by Nathan Weinberg on his excellent InsideMicrosoft blog:

In it, he points out that MSFT has now completed a recovery from where it was before April 28th and the now infamous earnings warning. That's correct, and I'm glad he noted it specifically.

His concludes with this:

The fact is, Microsoft’s stock fell because its investors didn’t believe in the company, and bolted at the idea of anything bold and competitive. The stock has recovered for one of two reasons: Either they believe that Microsoft is not going to compete as planned with Google, or those investors are gone, and Microsoft has a stronger investor base

On the former, I think he's half-right - investors didn't believe in the company. I disagree, however, that this was an aversion on the part of investors to seeing the company doing anything bold or competitive; Most of us would like to see the company do more (any?) of that. Instead, I think investors were sick and tired of negative surprises/excuses and based on the demonstrated five-year track record, correctly concluded that additional investments were unlikely to pay off via accelerated earnings anytime soon. WRT his second point - reasons the stock has recovered - I think he missed the most important point which seems to have eluded others as well. The recent run up in the stock, impressive though it has been, wasn't a fluke or free. It came at the cost of an additional $40B of shareholder money being committed to propping up the stock via the tender and additional buyback announcement. Indeed, when we get the quarterly financials, don't be surprised to find out that the company has been aggressively buying stock during the Q - which likely explains a good part of the upside pressure. Of course, the residual funds earmarked for the tender will eventually be depleted and then the stock will rise or fall on merit - not gimmicks. The former, is going to require execution excellence and earnings acceleration - something we haven't seen much of over the past 3-5 years. I do think Nathan is correct that MSFT may have a stronger investor base now, although I would attribute that 100% to the tender taking out some weaker hands directly and - by failing - drawing a line in the sand at $24.75 (which must have given pause to anyone considering shorting more or buying puts).

Personally, I'm happy to see the stock higher, but I don't give any kudos to the management team at all. Effectively, they've simply used another $40B of our money to [possibly temporarily] repair the damage caused by their own incompetence. Meanwhile, a lot of shareholders got hurt - some permanently (e.g. those forced out at the lows). Moving forward, buyback and tender gimmicks will only take you so far. At some point, this management team is going to have to do what it hasn't been able to for more than three years - execute effectively and accelerate earnings. And no amount of transparent shell games like this, are going to distract investors from the many failures in those areas while simultaneously signing off on $1B bonus packages to the management team generally. In my view, if they're unable to accomplish that task, which is a fundamental job requirement, then forget about reducing your bonus for optic's sake - just tender your resignation.


  • Yeah, that bonus "reduction" news was a joke. So Steve made like $100K less or something in the aggregate. That's not news, but clearly he's on the defensive to shareholders and that feels right. I still won't take him seriously until he gives up his salary/bonus for pure options based on performance for the year (and not back dated options). Still, glad to see the stock up again, I sold a bunch. :-)

    By Anonymous Anonymous, at 1:44 PM  

  • So now that MS has announced another "surprise" $1.2 billion in R&D spending to combat Google and Yahoo in addition to the previously announced $2 billion extra from last spring, for a total of $7.2 billion, I wonder what Wall Street's reaction will be like tomorrow? Probably not so good...

    By Anonymous Anonymous, at 10:46 PM  

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