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Technology Stocks : How high will Microsoft fly? -- Ignore unavailable to you. Want to Upgrade?

To: t2 who wrote (15770)	2/10/1999 12:03:00 PM
From: William F. Wager, Jr.	Respond to of 74651

Goldman Conference: No Clouds for Microsoft By Medora Lee Staff Reporter TSC 2/10/99 7:00 AM ET As Microsoft (MSFT:Nasdaq) CFO Greg Maffei prepares to give the breakfast keynote address at the Goldman Sachs Technology Investment Symposium, money managers and investment analysts will look for clues as to how the software giant may reorganize itself. But there is little cause for worry even though the move comes at a time when the Department of Justice, or DOJ, has scored some notable points in its antitrust case against Microsoft. Goldman Sachs analyst Rick Sherlund, whose firm has underwritten for Microsoft, says news that Microsoft is planning a major reorganization to focus more on customers and the Internet will probably have little impact on the company's business and earnings. "I think they just do that every year and a half to screw up our earnings model," Sherlund half-joked. "I think they've done it twice in the past year and a half, but it wouldn't have an impact on overall revenues and earnings of the company." Nor should Microsoft's latest slips against the DOJ lawyers. Last week, Microsoft's defense was seriously damaged when it produced a videotape intended to prove that a separated browser and operating system did not function well. The judge called the videotape unreliable evidence, forcing Microsoft to try it again. In the end, Microsoft was finally able to demonstrate its point, but many lawyers saw that as an embarrassing moment that could hurt Microsoft's credibility. Sherlund said the case remains a "back-burner" issue for now and will only start to take more prominence in investors' minds closer to judgement day. When that happens, probably around April or May, Sherlund predicts that the market could get jittery and shave $10 to $15 off Microsoft's share price. Most analysts and investors, though, believe that a dip of that magnitude in share price could be a great buying opportunity. One Midwest-based fund manager summed it up, saying he had no specific thoughts on Microsoft "except, they are awesome." At a time when software companies face uncertainties about how Year 2000 spending will affect demand for their products, Microsoft has no such fears. Analysts say that if there is one software company that should be resilient to Y2K bugs, it's the Redmond, Wash., giant. "I don't think [Y2K] will be much of a damper," says Sherlund. Though most analysts have forecast a slowdown in information technology spending later this year as companies await Y2K compliant software, Microsoft will likely escape with barely a dent in business. Not that business is bad now. Last quarter's extremely strong PC demand is likely to slow a bit, yet it should remain buoyant enough to keep Microsoft rolling in dough, analysts said. Most of Microsoft's revenues come from software sales on personal computers. When Microsoft reported its fiscal second-quarter earnings late last month, the company said net income surged 75% from year-ago levels due to an explosion in demand for personal computers. Maffei then estimated that worldwide PC demand in the final quarter of 1998 jumped between 25% and 30% based on Microsoft's sales to manufacturers. That was more than double the 12.2% rate market researcher International Data Corp. predicted. "It's hard to argue that the growth we saw in PCs in the fourth-quarter is sustainable, but there could be some stimulus from people who've waited a while to upgrade their PCs to be Y2K compliant," Sherlund says. Mike Kwatinetz, analyst at Credit Suisse First Boston, went as far as to say he believes Y2K "has only just begun to add to PC demand." He forecasts Microsoft to earn 65 cents per share in the third quarter of fiscal 1999, which is even with First Call's consensus estimate, and $2.60 for the year, a penny higher than consensus. (His firm has not underwritten for Microsoft.) As a result, Sherlund said he expects Microsoft earnings to increase 20% over the next four quarters, with the first half growing faster than the second half. Microsoft should also benefit from less bloodletting in its Internet business. Morgan Stanley Dean Witter analyst Mary Meeker continuously noted in her last three research reports that Microsoft's Internet business was picking up momentum. At the end of January, she wrote, "The company's Internet efforts are showing impressive statistics. The company is now the number three network on the Web (in terms of reach)." Meeker estimates Microsoft to earn $2.59 per share in fiscal 1999. Morgan Stanley Dean Witter has underwritten for Microsoft. As far as dark clouds are concerned, Sherlund is keen to know what strategy Microsoft will take in the battle of the platforms. "Larry Ellison (CEO of Oracle (ORCL:Nasdaq)) and Scott McNealy (CEO of Sun Microsystems (SUNW:Nasdaq)) are very smart guys and they keep coming back with new ways to disenfranchise Microsoft," he says. So who does Sherlund think will win the platform battle? "I really couldn't answer that question because I don't know. Microsoft hasn't made it clear what its strategy will be yet," he says. But to some IT managers and investors, the platform battle may not be as serious as analysts may think. "Microsoft is not going away," said an IT manager at the Goldman Sachs technology symposium who owns Microsoft shares in his personal portfolio. "I can tell you that now. It might just be whether Microsoft ends up with a 97% market share or a 94% market share. If it's 94%, it still sounds good to me."