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July 19, 1999
Microsoft's 5% Surge Leads the Nasdaq to a New High
By Andrew Bary
Vital Signs
The Dow Jones Industrial Average generally gets the headlines, but the stock market's star lately has been the Nasdaq Composite Index, which has risen 30.6% so far this year. A healthy 2.6% of that gain came just last week, leaving the Nasdaq at a record 2864. By contrast, the Dow rose just 16 points on the week, a gain of 0.1%, to a new high of 11,209. The Dow, ahead 22.1% for the year, was held back last week by declines in such economically sensitive stocks as Caterpillar, Alcoa and Union Carbide. The Standard & Poor's 500 Index, for its part, was up 1.1% in the five sessions, ending at a record 1418.
On Friday, the Nasdaq was led to its latest new high by Microsoft, which itself hit a new record. Shares of Microsoft, the largest company in the world ranked by market value, rose 6 3/16 to 99 3/8 ahead of its quarterly profit report Monday. Nearly all of the advance came Friday, when Microsoft surged 5 1/16 on market-leading volume of 57 million shares after The Wall Street Journal reported that the company is close to issuing a tracking stock for its Internet business, which bullish Wall Street analysts said could be worth as much as $50 billion.
Microsoft's market value now stands at a staggering $548 billion, way above second-place General Electric, which is worth $388 billion, and more than double the capitalization of third-place IBM. The Microsoft market value is based on the company's fully diluted shares outstanding, including options. Excluding options and other common-stock equivalents, Microsoft's market value topped $500 billion for the first time on Friday.
With Friday's move, Microsoft Chairman Bill Gates' stake in the company is rapidly approaching $100 billion. Gates' shares, some 991 million, were worth $98.5 billion, making him the world's wealthiest individual by a huge margin. Berkshire Hathaway Chairman Warren Buffett, who used to be No. 1, now is a distant second at $33.6 billion.
"Microsoft is just incredible," says Ted Aronson, head of Aronson Partners, a Philadelphia money manager. "People thought it was crazy when Microsoft had a $250 billion market value. But it could well become the first trillion-dollar company."
Microsoft may get another lift today when it reports profits for the fiscal fourth quarter, ended June 30. The Wall Street consensus is for 36 cents per share in earnings, up 44% from the year-earlier quarter. But if Microsoft's record of the past few years is any guide, the company likely will top the consensus by at least a few pennies. The unofficial "whisper" number is 38 cents, with Street analysts talking about stronger-than-expected sales of Microsoft's Office 2000 software package.
Microsoft is famous for providing lowball profit guidance and then easily topping the Street estimates. This appears to be the case for the current fiscal year, ending June 2000. The consensus estimate is for profits of $1.54 a share, up just 14% from the $1.35 expected for the just-concluded fiscal year. A more realistic expectation, given Microsoft's history, would be earnings growth of 25% or more, which would translate into $1.70 a share. Why aren't Microsoft earnings estimates more realistic? Because the company puts strong pressure on Street analysts not to deviate much from its guidance.
Microsoft isn't cheap, trading at nearly 60 times a potential $1.70 in profits in the current fiscal year. But the company has never been inexpensive, and its profit record is simply nonpareil, with compound annual growth of 40% over the past 10 years. One final Microsoft fact: Its stock now has risen more than 500-fold since it came public in 1986 at a split-adjusted price of 19 cents a share.
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