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Goldman downgrades Microsoft stock to 'neutral'

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Pre-packaged software giant Microsoft saw its stock rating lowered to neutral by Goldman Sachs today, in response to the company’s sluggish entry into the tablet and smartphone market.

The brokerage’s concerns reflected those of Microsoft’s own board, which last week put a cap on CEO Steve Ballmer’s bonus payout because of his failure to take on Apple and other rivals in the mobile and “form factor” space.

Goldman said it now expected Redmond’s core business to be affected by a longer PC refresh cycle. The sting in the tail being that Microsoft, as Ballmer has recently – finally – acknowledged, can no longer rely on those products alone. Diversify or die is, perhaps, the simplistic message.

Microsoft is committing 70 per cent of its 2010 R&D $9.5bn funds to the cloud in a clear signal to investors that the vendor is now “all-in” on skyward-inspired tech. Furthermore, MS is launching its Windows Mobile 7 platform on 11 October.

But none of that has been enough to stop Goldman slapping the back of Microsoft’s legs today, and Wall Street followed with a big fat groan.

In order to win back a gold star, Microsoft needs to divest its non-core businesses, such as gaming. At the same time the firm needs to push up its dividend to grab a bigger investor base, said the brokerage.

Redmond did exactly that in September, upping it by three cents, or 23 per cent, in a move to placate investors who've struggled to see much return on the stock in recent months. But that move clearly didn’t satisfy Goldman.

The brokerage slashed Microsoft’s price target to $28 from $32 and added that Ballmer’s crew needed to be a market leader in cloud computing where it’s currently not “a clear ‘winner’”, despite its worldwide data centre muscle and the CEO’s newfound affectation for the tech.

Shares in Microsoft fell to $23.91 on Nasdaq, after the downgrade.

Meanwhile, Ballmer is overseas in Europe bigging up Microsoft’s cloud computing ambitions in what is increasingly starting to feel like a (after)thought rather than market leadership role.

All Ballmer needs now is for ructions to develop among disgruntled staff, who might well be listening closely to what such a high-profile downgrade really means for the company. ®

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