Microsoft Bucks the Tech Trend

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Bullish Outlook for the Remainder of 2008

The potential for strong sales growth makes Microsoft's current price of about 19 times its projected 2008 earnings, roughly in line with other big software companies, look inexpensive, says Andy Miedler, a senior technology analyst at Edward Jones. "At this price, we continue to think it's a good entry point" for buying shares, he says. Microsoft isn't immune to economic problems, says Miedler: "Since last year, investors are waking up to the fact that tech is an economically sensitive area." But Microsoft could be well equipped to weather the storm.

During the conference call, CFO Liddell issued a bullish outlook for the rest of the fiscal year, which ends June 30. The company said fiscal 2008 sales will be $59.9 billion to $60.5 billion and per-share earnings will be $1.85 to $1.88. That represents an increase from its earlier forecast for $58.8 billion to $59.7 billion in revenue and $1.78 to $1.81 in per-share earnings. Analysts' consensus estimate for the year was $59.3 billion in sales and $1.81 in earnings per share.

Microsoft also predicted third-quarter revenue of $14.3 billion to $14.6 billion, and earnings of 43¢ to 45¢ a share. Analysts had expected $14.43 billion in revenue and earnings of 44¢ a share. Charles Di Bona, an analyst at Sanford C. Bernstein, wrote in a Jan. 18 note that consensus expectations for coming quarters don't sufficiently value the lift from Vista upgrades. "Microsoft's share price undervalues the true growth potential of the company," he wrote.

Microsoft's upbeat forecast comes during a season of varied outlooks from other tech-industry bellwethers. Apple's (AAPL) shares have tumbled by 13% since the company on Jan. 22 issued a softer-than-expected outlook (BusinessWeek.com, 1/22/08) for earnings in its March quarter. Intel (INTC) also issued a cautious outlook. Yet IBM (IBM) shares have risen by 4% since it announced on Jan. 14 that its fourth-quarter sales and profits beat analysts' estimates by a wide margin (BusinessWeek.com, 1/14/08).

Potential Trouble Spots

To be sure, there are still areas where Microsoft is vulnerable. Its online services business—mostly revenue from placing ads on the Web—widened its loss to $245 million during the second quarter, compared with a loss of $118 million a year earlier. "There are some pretty visible gaps in Microsoft's strategy, and the most visible one is in their online business," says Citigroup's Thill.

And worldwide PC sales, which rose a healthy 13.1% in the fourth quarter of 2007, according to market researcher Gartner (IT), could falter, hurting Microsoft's Windows and Office franchises. If the economy weakens companies may ax large but discretionary technology projects such as desktop software upgrades, which also carry hardware and labor costs, says David Smith, a vice-president at Gartner: "The uncertainty for Microsoft is Vista and Office upgrades could be put on hold."

For now, Microsoft's most important products continue to clean up, and the company can afford to pour money into chasing Google (GOOG) and other rivals in the online software business. That's making its stock look like a sound bet in uncertain times.

Ricadela is a writer for BusinessWeek.com in Silicon Valley.