Sierra,
In partial response to your questions, here are some thoughts:
1. It is important to recognize that the game Microsoft management is playing is actually beneficial long-term. I.e., the share buybacks will reduce earnings dilution long-term; and the lower the price they can obtain the shares at, the more cash MSFT will have for new ventures. It is somewhat droll, because few companies actually try to beat down their stocks. If anything, this is a testament to what their stock would do if they didn't keep beating on it.
2. Also recognize that, regarding fundamentals, little has changed in the last year or so, except that Microsoft has become even more dominant. I suggest you reread the posts in this area from those you trust on this thread, most recently that of Reg Middleton. [Good job, Reg.] If someone has discovered any fundamental revelations in the Barron's article, I would be pleased to discuss them. By my reading, it was all spin and no news. And a quarter's delay in Windows/98 has little short-term and no long-term consequences. In any event, IE 4.0 is not being delayed, and will be bundled with a substantial percentage of PCs shipping next quarter. Anyway, Microsoft continues to dominate its base markets, and also continues to grow rapidly into a number of new ones - again, all as has been discussed before.
3. Regarding earnings:
Forget about the analysts - MSFT earnings over the next few years are a primarily a matter of what the CFO decides. I discuss earnings because they are what the market uses to keep score, NOT because they are any good measure of their growth, as your will understand by the following analogy:
- Each quarter for the past several quarters, the CFO has been putting a substantial portion of revenues and (conservatively estimated) associated costs under a variety of shells. Each of the shells is to be turned over at different times. Furthermore, they have started turning over some of the shells, and also "discovered" that usually the actual costs were less than the ones under the shells.
- To make things even more interesting, for larger commercial accounts this is about to change. Microsoft is switching to "subscriptions", which essentially involves indefinite leasing of software rather than purchase. Among other things, this makes product version transitions a non-event from the standpoint of a buying decision; smoothes revenue flows (predictable both for the customer and Microsoft); and provides consistency in the pricing model with what enterprise-level accounts are already used to.
- The primary vehicle for busines, NT, has a considerably higher purchase price than Win/95 or Win/98, and will replace them eventually. Of course, the shells plus the "subscriptions", combined with the huge growth of NT, allow the CFO such latitude in earnings accounting that it is the primary determinant of earnings this fiscal year.
- This transition away from the business shell game will take quite a while to complete, during which the business shells will become fewer.
- The home and small business shell game will continue, unless Microsoft decides to lease to them also, providing updates as part of the service [which it has given some indication it is considering]. This would have major implications for the large number of pirated copies of Microsoft software.
Interestingly, the MSFT CFO has made various negative-sounding statements about revenue growth over the next year, but has refused to make corresponding statements about earnings that far out. Since the CFO basically controls the shell and subscriptions game, it is unlikely that the CFO has no idea what earnings will be, given his projected revenue growth. Isn't is more likely that the earnings growth would be much higher than what the analysts are projecting, thus destroying his story designed to keep the stock price from growing too fast?
4. Also regarding earnings: the above discussion should give you some idea why they should not be used as the measure of valuation. Reginald can explain it to you much better. It simply makes no sense that, depending on which side of the bed the CFO gets up on, a company's valuation should dramatically change - but that is what the earnings game does. This should also explain to you why using revenue growth to predict 1998 earnings growth is so naive as to be almost silly. [But the Barron's writer does it - he takes a 15-20% PC revenue growth, which the MSFT CFO has linked to MSFT revenue growth, and somehow makes that into a MSFT FY98 earnings growth rate.] I will give my own guess for MSFT FY98 EPS growth [i.e. vs. FY97]: 30-35%. I say that simply because it seems like a nice number that the CFO would have picked - not as low as the analysts' 20-25% [they are normally too low on MSFT et al a year ahead anyway], but not high enough to get everyone too excited and so drive up the stock too fast. Of course, this would be down from the 50%+ EPS growth in FY97 [on an revenue increase of about 30%, I might add]; however, it would be much closer to Microsoft's historical growth rate, and to one that might be sustainable for several years at least.
5. Regarding MSFT stock price: over the intermediate term (say 5 years or so out), I believe it can compounding at an average of 30%/year, with the possibility of as much as 35%/year compounded if their investments go particularly well.
6. This post is already too long, so I will end it.
Best regards,
Arno |
