Thursday, July 23, 2009

Microsoft doing reasonably well even if Wall Street continues to struggle to understand them

Although Wall Street may be disappointed, I think Microsoft (MSFT) actually did reasonably well this past quarter given the challenging economy. The fact that Wall Street traders and analysts are disappointed with the results just goes to show how poorly Wall Street understands the dynamics of the company's business. It is not a terribly difficult business to understand, but Wall Street screws up anyway.

One issue is that now that Apple (AAPL) uses "Intel Inside", you can no longer easily extrapolate from Intel's (INTC) results to Microsoft's results, especially when Apple just had a great quarter. Why is that so hard to understand.

Another issue is that channel inventories are very dynamic, so trying to extrapolate directly and linearly from monthly PC sales is not a great way to estimate quarterly revenue for Microsoft.

Third, Microsoft is now "multi-core", with business applications (even besides Office) and server and tools (and now search) as separate business lines which do not track PC shipments.

Finally, Microsoft sells a lot of products to average consumers, so a challenging economy means a challenging business environment for Microsoft. Apple does have it easier since they are selling premium products into a demographic space that is not as economically sensitive for even pricey Apple products.

Overall, Microsoft could have done a lot worse in this economy.

The good news is that analysts are right that business is beginning to stabilize and should pick up incrementally over the next six months and into 2010, especially as Windows 7 and new PCs pre-installed with Windows 7 hit the streets in the fall and winter.

How Wall Street will respond to the current quarter report and fiscal year 2010 outlook is unclear, but I'm happy to continue holding my current stake and continue collecting and reinvesting the nice dividends.

The market may dip strongly at the open, but the deeper it dips, the more likely it will bounce back from the dip.

I am curious to hear what Goldman Sachs will have to say about Microsoft stock as an investment at this stage. Revenue for the quarter was only modestly below Goldman's forecast: $3.11 billion vs. $3.22 billion. Earnings were also only modestly below analyst consensus forecast: 36 cents vs. 37 cents. I don't see any of these numbers as such a big deal -- unless you are a Wall Street trader or analyst who is clueless about Microsoft's business. 

-- Jack Krupansky


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