CNN/Money 
News > Technology
graphic
More misery for Microsoft?
The legal battle with the European Union is heading to a close, but doubts remain for Microsoft.
March 15, 2004: 1:05 PM EST
By Paul R. La Monica, CNN/Money senior writer

NEW YORK (CNN/Money) - The end of Microsoft's antitrust legal battle with the European Union may soon be at hand.

Fifteen European nations agreed unanimously Monday to back a plan by the European Commission that would impose a fine on Microsoft and force it to change the way it ships its Windows Media Player software to computer manufacturers. A final ruling is due on March 24.

And investors hope that a resolution to this fight, regardless of whether there's a settlement or a big fine, could serve as a catalyst to finally get Microsoft's shares moving significantly higher again.

The EU litigation overhang has helped to keep a cap on Microsoft's stock for the better part of a year. Shares of Microsoft (MSFT: Research, Estimates) have gained just 3 percent in the past 12 months, compared to a 35 percent rise for the S&P 500 and 48 percent gain in the Nasdaq.

Waiting for a plan

One of Wall Street's biggest gripes with Microsoft during this time has been that the company continued to increase its formidable cash stockpile. As of the end of December, Microsoft had $52.8 billion in cash on its balance sheet.

Microsoft has maintained that it needs such a large amount in its coffers because of outstanding legal cases, most notably the one with the EU. But now that the EU situation is nearing a conclusion, investors will clamor for more details about what Microsoft will do with its cash.

More about Microsoft
graphic
EU states back Microsoft sanctions
Hey Bill! Go buy something
Microsoft's results a mixed bag
Can Microsoft change its image?

To that end, Microsoft CFO John Connors told investors last month that the company will unveil a detailed plan for what it intends to do with its cash before its next analyst meeting in July.

Concerns about Microsoft being hit with a crippling fine, don't appear to be the problem, given Microsoft's huge sum of cash. "If the fine is $500 million, $1 billion or $10 billion, it's not a lot of money for Microsoft. Most investors don't consider that a significant issue," said Drake Johnstone, an analyst with Davenport & Co.

What is an issue is how Microsoft plans to spend the bulk of the cash it isn't earmarking for other potential fines or legal settlements.

Microsoft began paying a dividend in March 2003 and doubled it in September. Still, the 0.6 percent yield is relatively small and speculation has centered on Microsoft announcing another dividend increase in the next few months. The company is also expected to increase its share buyback program.

David Hilal, an analyst with Friedman Billings Ramsey, said a dividend increase would be a major positive for the stock because it could attract more large value-oriented institutional investors. "That will open up the stock to new investors and could get it moving again," Hilal said.

We're number 6?

But the legal clouds and cash questions are not the only factors that kept Microsoft from participating in last year's market rally. Microsoft has also suffered from concerns about sluggish growth prospects. Earnings are expected to grow at a 10 percent clip annually over the next few years.

The company's deferred revenue, which measures the amount of sales it expects to earn in coming quarters from license renewals, has been declining. That's raised worries about whether or not customers are finding a need to purchase new software.

Sliding to the six spot?
Microsoft is no longer the world's most valuable firm...and it could fall further.
Company Market Value (Mill) Price Change (12 months) Est. LT EPS Gr. Rate 
General Electric $307.25 21.4% 10% 
Exxon Mobil $277.81 21.9% 8% 
Microsoft $274.42 2.9% 10% 
Pfizer $269.32 20.5% 14% 
Citigroup $254.37 47.7% 12% 
Wal-Mart Stores $253.09 18.0% 14% 
 * All data as of 3/12/04
 Source:  Thomson/Baseline

Microsoft has also been plagued by security lapses -- several high profile viruses and worms have targeted the Windows operating system in recent months. And the company is facing more intense competition from Linux, an open source operating system that some corporate and government customers have started to adopt.

In another setback, Microsoft announced last week that it is delaying the release of its latest database product, code-named Yukon, until 2005. The new software, now named SQL Server 2005, was originally expected to be available by the second half of this year.

This could be a problem since database leader Oracle (ORCL: Research, Estimates) announced strong results in its database division last week. Hilal said it's critical for Microsoft to avoid further delays with Yukon due to the recent success of Oracle.

All these woes have caused Microsoft to lose its spot as the most valuable company in the world, as measured by market value. At the end of 2002, Microsoft had a healthy lead: It was worth nearly 15 percent more than General Electric.

Microsoft still held on to a slight edge over GE (GE: Research, Estimates) as of the end of last year's third quarter, but by year's end, the company had fallen to the second spot. And Microsoft has continued to slip. It is now the world's third largest company, trailing both GE and Exxon Mobil (XOM: Research, Estimates). For a brief time last week, Microsoft was even passed by Pfizer (PFE: Research, Estimates).

YOUR E-MAIL ALERTS
Microsoft Corporation
Computer Software
Tech stocks

So will Microsoft continue to slide down the ranks? It's not out of the realm of possibility.

Based on Friday's market valuations, Pfizer's market value is only 1.9 percent below Microsoft's. Meanwhile, Citigroup (C: Research, Estimates) and Wal-Mart Stores (WMT: Research, Estimates) trail Microsoft by just 7.9 percent and 8.4 percent respectively. And all three stocks have higher projected long-term earnings growth rates than Microsoft.

Alan Davis, an analyst with McAdams Wright Ragen, said he sees little more downside to Microsoft's stock at this point. The stock is now trading at about 20 times fiscal 2005 earnings estimates, which Davis said is reasonable. But he's not expecting the stock to come roaring back either.

"Microsoft might participate in a rally to a greater degree than it has in the past year and a half," Davis said. "But it's not going to be a high-flier."

Analysts quoted in this piece do not own shares of Microsoft and their firms have no investment banking relationships with the company.  Top of page




  More on TECHNOLOGY
8 must-have travel apps
What's Twitch? Company exec explains.
Cybersecurity: How safe are you?
  TODAY'S TOP STORIES
Malaysia Airlines slashes 6,000 jobs
Japan's economic revival is in jeopardy
Stocks: 5 things to know before the open




graphic graphic

Market indexes are shown in real time, except for the DJIA, which is delayed by two minutes. All times are ET. Disclaimer Morningstar: © 2014 Morningstar, Inc. All Rights Reserved. Disclaimer The Dow Jones IndexesSM are proprietary to and distributed by Dow Jones & Company, Inc. and have been licensed for use. All content of the Dow Jones IndexesSM © 2014 is proprietary to Dow Jones & Company, Inc. Chicago Mercantile Association. The market data is the property of Chicago Mercantile Exchange Inc. and its licensors. All rights reserved. FactSet Research Systems Inc. 2014. All rights reserved. Most stock quote data provided by BATS.
Market indexes are shown in real time, except for the DJIA, which is delayed by two minutes. All times are ET. Disclaimer Morningstar: © 2014 Morningstar, Inc. All Rights Reserved. Disclaimer The Dow Jones IndexesSM are proprietary to and distributed by Dow Jones & Company, Inc. and have been licensed for use. All content of the Dow Jones IndexesSM © 2014 is proprietary to Dow Jones & Company, Inc. Chicago Mercantile Association. The market data is the property of Chicago Mercantile Exchange Inc. and its licensors. All rights reserved. FactSet Research Systems Inc. 2014. All rights reserved. Most stock quote data provided by BATS.