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Microsoft's wormy problem
Investors should not dismiss concerns of more security flaws when looking at Microsoft's stock.
September 11, 2003: 1:36 PM EDT
By Paul R. La Monica, CNN/Money Senior Writer

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NEW YORK (CNN/Money) - This is starting to get ridiculous.

Microsoft admitted on Wednesday that it has found yet another critical flaw in its operating system that makes it vulnerable to yet another attack by hackers, similar to last month's Blaster worm that caused headaches for users of the latest versions of Windows.

It's the tech sector's equivalent of the really old Saturday Night Live skit (back when the show was funny) that proclaimed Generalissimo Francisco Franco was still dead.

This just in: Windows is still a big, fat target for hackers.

And while the continued threat of worms and viruses such as the ultra-annoying SoBig.F virus that mercifully expired on Wednesday has raised the ire of customers and tech columnists like yours truly, investors have shrugged off Microsoft's continuing security woes.

Shares of Microsoft (MSFT: Research, Estimates) rose slightly on Thursday and the stock, which has been a laggard for most of this year, has recently begun to pick up steam. In fact, since Blaster first began infecting computers on August 11, Microsoft's stock has gained nearly 10 percent.

Now I'm not going to do a Chicken Little and suggest that Microsoft's stock is a screaming short because of worms and viruses. But shouldn't investors be a little more concerned?

Worms are a fact of life

Some analysts think that investors have simply come to grips that Microsoft, by virtue of its market dominance, is going to continue to fall victim to hacker attacks.

"This is just part of the software world," said David Hilal, an analyst with Friedman Billings Ramsey. "And because there's a remedy for these problems, investors don't lose too much sleep over it."

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Brendan Barnicle, an analyst with Pacific Crest Securities, adds that the fact that Microsoft is warning people in advance about flaws helps calm investor fears somewhat.

Plus, even though the latest rounds of viruses and worms have been highly irritating, they have not caused significant economic damage.

And finally, there's this somewhat ironic twist. The very thing that makes Microsoft such an appealing target is what also prevents it from being hurt too badly: its nearly unrivaled position in the operating system market.

Where else are consumers to turn? Linux? Apple? In theory, they could. But that 's highly unlikely given how entrenched Windows is in the world of tech. It would be a major hassle, and a costly one to boot, to switch operating systems.

Potential legal risks?

Now that's all very logical. But one analyst has a concern that investors may be overlooking.

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"Microsoft is a target because it has a huge bucket of money so I'm a little worried about litigation risk. What if Microsoft was held accountable for the costs associated with damage from hackers?" said Kimberly Caughey, an analyst with Parker/Hunter.

That opens a big can of uh, well, worms.

What if disgruntled Windows users who had important files destroyed by a virus file a class action suit? What kind of uproar would there be if millions of people suddenly had confidential information such as credit card numbers or social security numbers stolen due to a hacker attack?

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Written by: Paul R. La Monica

Or what if some overzealous politician (take your pick) decides that it's time to investigate why Microsoft isn't doing a better job of fixing problems before an attack? It's not that implausible.

Of course, these are all hypothetical scenarios that won't affect Microsoft's revenue or earnings in its next quarter. So it might be tempting for investors to not worry about them.

But until Microsoft finds a way to significantly reduce the vulnerabilities in Windows, savvy investors should at least be thinking about these questions rather than dismissing them entirely.

Parker/Hunter's Caughey and Pacific Crest's Barnicle do own shares of Microsoft but their firms have no investment banking relationships with the company. FBR's Hilal does not own Microsoft and his firm does not perform investment banking for the company.

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