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Investors are wondering if Microsoft's best days are behind it and what that means for the stock.
October 22, 2003: 5:19 PM EDT
By Paul R. La Monica, CNN/Money Senior Writer

NEW YORK (CNN/Money) - Is Microsoft about to report surprisingly strong earnings, or are its days of expansive growth forever in the past?

That answer depends in large part on what the company has to say in its fiscal first-quarter earnings report Thursday.

Analysts expect Microsoft -- the world's largest company by market value -- to report earnings of 29 cents a share, compared with 28 cents a year ago. Wall Street's consensus sales forecast is $8.08 billion, just 4.4 percent higher than revenues in last year's fiscal first quarter. Those aren't exactly high-octane numbers.

But the possibility for Microsoft (MSFT: Research, Estimates) to report better-than-expected numbers seems high, given recent evidence of unexpectedly strong growth in the PC market.

Microsoft, of course, is heavily tied to the PC market, since so many computers run on Microsoft's Windows operating system and use its Office suite of software. The company said in July that it was predicting PC shipment growth of just 4 percent to 6 percent during its fiscal year.

Last week, however, tech research group IDC reported that PC shipments for the third quarter surged 15.7 percent from a year ago, thanks to strong sales of notebook computers. This strength was definitely a factor behind the better-than-expected third-quarter report for Intel, the market leader for chips used in PCs.

With this in mind, Brendan Barnicle, an analyst with Pacific Crest Securities, said he thinks Microsoft will beat Wall Street's estimates and report earnings per share of 30 cents on sales of $8.16 billion.

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In addition to strength in the traditional PC business, Barnicle also expects to see solid sales for Microsoft's server software. The company released Windows Server 2003 in April, and Barnicle said he thinks this product will account for half of Microsoft's overall server sales.

The corporate market is becoming increasingly important for Microsoft, with server software sales expected to account for about 22 percent of total revenue in Microsoft's latest quarter.

"This segment of the business could provide wind for Microsoft's sails for the coming years," Friedman Billings Ramsey analyst David Hilal wrote in a report this week.

Spending money to make money?

Still, can decent sales growth be enough to get the stock moving? Shares of Microsoft have gained 13 percent so far this year, well below the performance of many other large tech companies.

Even if the company beats estimates for the quarter, it's unlikely that Microsoft, given its conservative nature, will raise guidance for fiscal 2004 dramatically.

Barring that, the current earnings and sales growth estimates for the full year paint a picture of steady but not spectacular growth. Most analysts predict 8 percent sales growth and a 9 percent increase in earnings for the year.

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"I don't see Microsoft ever being considered a high-growth company again," said Wendell Perkins, manager of the JohnsonFamily Large Cap Value fund, which owns Microsoft.

Nonetheless, Microsoft does now pay a dividend, which could attract some income-oriented investors. Although the yield is currently a paltry 0.6 percent, Microsoft has already doubled the dividend once this year (it began paying it in March) and has the financial flexibility to do so again, with $49 billion in cash on its balance sheet.

That pile of cash could also be used to spur growth through acquisitions. In fact, Microsoft CEO Steve Ballmer coyly hinted during a tech conference in Orlando this week that the company could be looking to do a deal.

Perkins said that an acquisition of anti-virus software company Symantec (SYMC: Research, Estimates) could make sense considering Microsoft's widely publicized security problems this summer. Several worms targeting computers running on Windows surfaced in August and early September.

Barnicle owns shares of Microsoft but Hilal does not. Neither analyst's firm has investment banking ties to Microsoft.  Top of page

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