In Analysts' Eyes, Microsoft Is Still a Giant With Legs
The government's antitrust case against the Microsoft Corp. is expected to be long and arduous. Shareholders naturally wonder what it bodes for the stock.
On Wall Street, many analysts are cautiously optimistic for a fairly painless settlement, but they expect the stock to underperform in the meantime. Several money managers who hold the stock offered their takes on its prospects while the legal wheels turn, and thereafter:
-- The market usually overreacts. Kevin Landis, portfolio manager for the Firsthand Technology Value fund and Technology Leaders fund in San Jose, Calif., said a snap market reaction to legal battles generally fades into irrelevance over time, as continued innovation renders disputes moot faster than they can be resolved.
"We have one company in our portfolios, Avanti Corp., a specialty software firm, that is being sued over a first-generation product," Landis said. "Meanwhile, they are now shipping third generation.
"Discussions about Windows 95 and 98 will probably end up being a footnote five years from now," he said.
-- Plenty of upside remains. Robert E. Turner, chief investment officer of Turner Investment Partners in Philadelphia, who manages the Turner Growth fund, said Microsoft's stock price could go up quite a bit even if the legal battle was long.
"There are a lot of deferred earnings associated with Windows 95, which makes the stock look undervalued" at current prices, Turner said, despite its high price-to-earnings ratio of 51.39.
Even if the government prevails, Turner does not foresee a collapse in the stock; rather, he thinks it would become more of a market-average performer.
-- Microsoft isn't preoccupied. Scott W. Schoelzel, a manager of the $8.5 billion Janus Twenty fund in Denver, visited Microsoft last week and returned convinced that the company has a strong hand that it is playing well and that it will not be frozen by Justice Department scrutiny.
"In the short run, the stock trades sideways," Schoelzel said, "because people need time to sort things out." But Microsoft has not lost credibility on Wall Street, he said. As the company shows it can isolate the distractions of the legal fight, he said, "the stock will begin moving forward again."
-- The Government may settle for token concessions. Philip J. Orlando, chief investment officer for Value Line Asset Management, said that Microsoft would not perform well until the black cloud of government intervention had passed, but that pass it would. "I believe, with minor modifications, Microsoft will be the big gainer," he said.
"Once the government gets shot down, the stock soars" to $110 this year and $130 the next, he said. Microsoft closed on Friday at $85.5625.
-- "Baby Bills" may be on the way. Michael Murphy, editor of the California Technology Stock Letter in Half Moon Bay, Calif., brushed aside the short-term implications of the suit because Windows 98 is not vital to Microsoft's profits this year. But bigger threats loom.
"Once the government starts down the line with antitrust concerns, they start focusing on companies and sectors, tending to break a company up, because it's the only instrument they have," he said. "Microsoft is an easy company to break up."
And that may not be bad: After AT&T was broken up in 1984, the Baby Bell stocks did well and shareholders benefited greatly, Murphy observed, but IBM stock languished after it emerged in one piece from a 13-year antitrust investigation.
-- Big money may flee. Microsoft is a bellwether company widely owned by institutions that emphasize short-term results, said Richard Cripps, chief market strategist at Legg Mason in Baltimore. Fears that Microsoft's growth may be crimped could lead them to sell and look elsewhere. But Microsoft has more than $12 billion in cash and adds $2 billion more a quarter, he noted. "It is simply one of the great franchises of our time."
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