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Thirtysomething for Mister Softee
Microsoft will hit the 30-year mark as a company in 2005. But will its stock finally hit $30?
January 26, 2005: 12:54 PM EST
By Paul R. La Monica, CNN/Money senior writer
Microsoft has been stuck in a narrow range for the past two years while the Nasdaq has surged.
Microsoft has been stuck in a narrow range for the past two years while the Nasdaq has surged.

NEW YORK (CNN/Money) Microsoft turns 30 this year. But it's 30 going on 30...at least when it comes to its stock price.

Shares of Microsoft are currently at about $26 and have failed to finish above the $30 level since January 2002 (after adjusting for stock-splits and last year's special one-time dividend).

The company came close a couple of times last year and there were a number of factors that could have gotten the stock over the hump: There was the one-time payout of $3 a share; Microsoft increased its regular dividend and boosted its stock buyback program; and it resolved many of its outstanding legal issues.

Still, shares gained just 8 percent in 2004.

The problem for Microsoft (Research) is that, like many thirtysomethings, it's mature. And "mature" on Wall Street is a code word for boring.

Microsoft will report its fiscal second quarter numbers on Thursday and analysts are forecasting just a 4 percent increase in revenues from a year ago, to $10.55 billion. And earnings, excluding stock compensation charges and one-time expenses, are expected to fall slightly, to 33 cents a share from 34 cents a share in the same period last year.

When push comes to shove, analysts say the company needs to show higher levels of growth in its two major business lines, the Windows operating system unit (which Microsoft calls Client) and its Office suite of software (which Microsoft calls Information Worker). These two divisions accounted for 60 percent of Microsoft's total sales in its second quarter.

Waiting for Longhorn

Analysts say that many consumers and corporate buyers are holding back on purchasing new software from the company until Microsoft releases its new version of Windows, known as Longhorn, which isn't due out until 2006. That's a big reason Wall Street expects just a 7 percent increase in sales for fiscal 2005, which ends in June, and flat growth in profits.

"At best it will be another year of sluggish growth for Microsoft," said Richard Williams an analyst with Garban Institutional Equities.

Microsoft isn't aging gracefully.

To combat the slowdown in its top businesses, Microsoft has stepped up its efforts in the server software market. Sales of Microsoft's server and tool products increased nearly 19 percent in its fiscal first quarter and the business now accounts for nearly a quarter of total sales.

Microsoft has also been bulking up in the supernova hot area of Web search. Its MSN Web division, now profitable and growing rapidly, has emerged as a legitimate competitor to the likes of Google (Research) and Yahoo! (Research). But that business only accounted for 6 percent of sales and 2 percent of operating profits in Microsoft's fiscal first quarter

The company also is hoping that home entertainment, which includes its Xbox video game console, will be a big business. And by all accounts, the company had a reasonably strong holiday season for the Xbox thanks to the company's blockbuster Halo 2 game.

Jamie Friedman, an analyst with Fulcrum Global Partners, wrote in a research report that he thinks Microsoft will be able to beat Wall Street's sales estimates for the second quarter because of strong Xbox sales.

Cheap stock but where's the growth?

Still, all that probably won't be enough to compensate for the lack of exciting revenue growth in the client and information worker businesses. So even though shares trade at a relatively attractive valuation of 21 times 2005 earnings estimates, that may not tempt investors.

"Microsoft has been caught for the past three years between value and growth and is trying to find itself. It appears cheap but it's a moderate growth story so it will probably be bound to range in the upper $20s for the rest of this year," said Alan Davis, an analyst with McAdams Wright Ragen.

Microsoft isn't the only company with a growth problem. Many large software companies are facing lethargic prospects.

Along those lines, enterprise software leader SAP (Research) reported Wednesday morning that it was seeing pricing pressures in its business. So even though the company expects decent license revenue growth in 2005, it said that profit margin growth would be relatively flat.

But tough competition is one reason why the industry has entered a hyper-consolidation mode. Acquisitions are seen as a way to lift flagging sales and earnings. In fact, Oracle (Research), which recently completed its long and contentious takeover battle for PeopleSoft, raised its earnings target for fiscal 2006 Wednesday morning, in part due to profit contributions it expects from PeopleSoft.

With that in mind, Davis said he wouldn't be surprised if Microsoft went on the prowl for some software deals of its own.

And one fund manager who owns Microsoft said he would like to see the company make a major deal in order to rejuvenate its growth.

"Microsoft has to do something to start growing again and I think the only way to do that is to buy companies. It's still a great company but it's stuck in the sand," said Knox Fuqua, manager of the AAM Equity fund.

Analysts quoted in this story do not own shares of Microsoft and their firms have no investment banking ties to the company.  Top of page

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