Possible 20% decline for Microsoft.??
Microsoft - Should have played Sorry
Independent Buy-Side Research By The-Adviser.com - Sunday, 11/7/99
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New York - On Friday, the judge found that Microsoft found that the Company has a monopoly in the manufacture of personal computer operating systems (not illegal). The judge also indicated that Microsoft clearly tried to use its monopoly position to acquire a monopoly in the Internet browser market (illegal).
The decision was not a surprise but it was stunning and unexpected in that the judge refuted almost all of Microsoft's positions. The stock, which dropped over 4 points in late night trading in Friday, is expected to be the focus of attention this week. Here is what we expect will happen to the stock over the next two to three weeks:
Increased Volatility on Monday - We expect a sharp drop in Microsoft shares upon the open. We expect this decline to be a minimum of 10% with larger declines on the day reaching 15 to 20%. Most institutional buyers and sellers are expected to remain clear of any trading, hence, the stock will be impacted primarily by day traders and individual investors. Whatever the decline, we do expect Microsoft to close up off its Monday low.
Paring of Portfolios - Over the next week, we expect institutional shareholders and mutual fund managers to pare their Microsoft holdings. This will continue the downward pressure on the stock. We expect this because institutional shareholders and mutual fund managers must manage their risk profiles. Selling will also represent the protection of capital gains built up over long periods of time.
Microsoft BuyBack - Although Microsoft has not announced any intentions of a stock buyback, we expect the Company to initiate one. The downward pressure on the Company must be offset by large buyers otherwise the stock will continue to drift. We do not expect to see large institutional buying until next year.
Re-valuation of Microsoft - Analysts, including us, are busy conducting analyses of what the financial impact will be to Microsoft under a best case damage scenario. We believe the final outcome (best case) will be that Microsoft will be forced to pay billions of dollars for its actions and be forced to unbundled its products. This will have a negative impact on the Company and will impact its valuation.
We believe that an individual investor that holds Microsoft should pare their holdings if the stock remains more than 5% of a total portfolio. Investors who don't own Microsoft should wait until the stock finds a bottom and then consider averaging into the stock.
We go back to our comments that we first made when we chose not to add Microsoft to our Top Ten Stock Picks in 1999 (it did make our Top Ten in 1998). The risk of unknown is too great at this moment and the lack of a positive surprise is doubtful. Until additional facts come out, Microsoft is an AVOID which represents a downgrade from BUY.
This week, we will be issuing special reports on Microsoft as market conditions warrant.
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