Updating the Record

I know what you're thinking - two posts in one day? That's right - and still the same low subscription price!

Actually, last weekend after mowing my moss lawn, I checked my blog where one of my adoring fans asked:

What do you think about the stock now? How is it possible that you write long notes about how the stock is busted and how you told us so - but when it bounces back and actually outperforms, you are silent. I guess you just move on to the next topic/rant.

I've been working on a response off and on during the week - and here it is. BTW, I'm thinking they're not going to like that recent Microsoft's $6M+ Dollar Man post either. Nevertheless, the commenter is correct that the stock has performed better of late. To be honest, I hadn't really noticed since I was away for several weeks and it had been lagging badly prior to that. But if you check now, recent performance plus a more favorable calendar compare makes for some marked improvement. For example, when I penned the specific post on which that comment came through (March 08/07), MSFT had underperformed the NASDAQ on every standard time frame up to 6 years - a fact that I noted at the time. But if you do the same compare now, it has outperforming on the 5-day, 10-day, 1 month, 3 month and 1 year views. Progress - undeniable. Like most shareholders, I'll take it. However, it has still underperformed YTD, and over 2, 3, 4, 5, and 6 years. For example, see the 6-year chart below using just obvious peers SAP, ORCL, HPQ, DELL, and the NASDAQ index (adding high-fliers like GOOG, AAPL, CRM, YHOO, or even EBAY, etc. would have made it unreadable given their dramatically better performance) - that's MSFT on the bottom btw:

Also, note that this better performance comes after ~$24B in buybacks Q4/06 to present (including $6.7B in the last Q alone), which sadly has reduced shares outstanding by only 553M thanks to ongoing dilution - aka paying insiders. As a result (and combined with dividends), MSFT's cash+st investment budget has dropped from $34.161B to the current $28.23B over this period. In other words, it hasn't been free.

So while I'm encouraged by the recent improvement, it's hardly something I'm going to dedicate a glowing post to. But keep in mind that I'm a long-term holder - so this was just a recovery to me. If, on the other hand, you're a short-term holder who picked MSFT up last year at the lows after Ballmer's latest disappointment, then you should be ecstatic with your return. As a long-term holder, I'm also cognisant of the fact that even MSFT's prodigious cash position is eroding rapidly under the weight of these massive buybacks - and that's fundamentally not sustainable. So while there's $22.5B left in approved purchases, MSFT will soon have to slow the pace substantially or face taking cash+st investments below $20B (which imo is unlikely). Therefore, at some point the management team will run out of stock Viagra and price will go up or down based solely on real market demand and non buyback-massaged EPS. For it to go up materially, the market will want to see earnings acceleration, evidence that previous "investments" are finally paying off, and/or bold new moves that show this company isn't headed to irrelevance. In other words, all the things they haven't seen much of this decade. Otherwise, do the math on expected earnings times a sustainable P/E (hint: 25+ on EPS growth of 12% likely isn't it), hope the general market doesn't implode and/or MSFT miss their EPS targets, and look forward to a best-case scenario of modest annual appreciation from here consistent with that (with the normal gut-wrenching plunges along the way, and for as long as MSFT can keep growing earnings).

Now, if you ask what has impressed me lately? What is worthy of a positive post and gives me some optimism that maybe, just maybe, this ol' dog may have some hunt left in it after all? It's this: Silverlight. Way late, but finally some evidence that MSFT is prepared to embrace and go after the Web opportunity versus ceding it to Open Source, Adobe, etc., while busying themselves defending - not very well - the desktop cash cows.

Alas, others are far better qualified to blog about it than I am. So see sample coverage here:

• New Microsoft tools for Web developers
• The Two Webs
• Why Silverlight Is Important
• Silverlight: The Web Just Got Richer
• What is Silverlight? (The Poster)

Or just Google Windows Live it. :-)

Update: Added a 6-year chart and related commentary.

Update 2: Corrected some numbers based on commenter feedback and review of the 10-Q.