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How will the verdict hit the MS stock price?

It may be goodbye to beating the street

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MS on Trial Microsoft's investors know very well that the company will not be able to make nearly as much money with its conduct closely monitored by the DoJ and Judge Jackson. A restrained Microsoft may therefore find itself unable to produce that little bit of extra revenue to "beat the Street" (financial analysts love this of course, and may well conspire to help achieve it).

For years Microsoft has put its tongue in its cheek, claimed that the future looks bleaker, and begged the financial analysts not to forecast results that are too good. At times, Microsoft has even talked down its share price - Ballmer did this with great success last year (and surely not because Microsoft was buying its own stock?). On the other hand, Goldman Sacks' Rick Sherlund tried to talk Microsoft's shares up, having been a bear earlier, and failed.

Next month, Microsoft can probably resume buying its own shares, and will hope to send the price up substantially to please - most of all - its employees. But there's a considerable downside possibility as well that must be factored in. On Tuesday, Microsoft's new CFO John Connors gave a keynote at the PaineWebber technology conference. He has previously admitted that the present 4th quarter ending 30 June would be a difficult one, and that the outlook for the next financial year was not so good either: he expects 15 per cent growth (20 per cent was "unrealistic"), and if this were to come to pass, the Street would not be happy.

He hinted that the DoJ case was interfering with growth when he said that "when the case goes into the appeals process I think we can have the kind of growth we feel good about...". Could that mean growth is behind the Street's expectations at present?

Connors was also pessimistic about the shortage of Pentium III chips, so that PC growth would be between 12 and 15 per cent in fiscal 2001. He admitted the PC consumer market had slowed - in Europe because of the weak euro, and in the US because of the stock market slump.

The more astute of Microsoft's investors may well be wondering if Microsoft will have to issue a profits warning at some stage soon, because of its inability to meet the voracious requirements of the Street. When IBM announced late last year that it expected some bad quarters - in effect it was a profits warning - its share price suffered considerably (until yesterday, funnily enough - when even Corel managed to put on more than 30 per cent). Sherlund claims that if broken up, Microsoft's value would be 15 per cent less. This may be a very modest estimate. ®

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