(MONEY Magazine) – Whenever an important tobacco case goes to trial--and there have been some half-dozen trials in the past six years--a tobacco analyst named Gary Black, from the Wall Street research firm Sanford C. Bernstein, has a certain routine he follows. He recruits someone, often a student from a law school in the vicinity of the courthouse, to sit in the courtroom for the trial's duration. This person is hired to watch the proceedings, of course, but also to pick up courtroom scuttlebutt and provide some analysis of the legal fine points being argued. At the end of each day's session, this observer calls in what he or she has learned to Black, who writes it up, adds his own analysis and sends it along to his clients.

It should be obvious why a securities analyst would do this, but let's take a second to spell it out anyway. First, litigation is widely viewed as the key variable in determining the short-term future of the sector that Black covers--and thus the short-term price of stocks in that sector. Indeed, the uncertainty that litigation presents is the main reason for the paltry price-to-earnings ratios of the tobacco stocks. So if Black can get a sense of how a particular trial is going for Big Tobacco, he can make better stock calls. Second, by having his own eyes and ears in the courtroom, Black doesn't have to depend on the industry for his information. "We just don't like to trust the industry's judgment on this stuff, because in their eyes, everything's always wonderful," he says bluntly.

Since mid-October, I've been sitting in a courtroom in Washington, D.C., watching different, but also very important, litigation: United States vs. Microsoft Corp., the most important antitrust case in decades. The courtroom is surprisingly small for a case this big, holding only around 100 spectators. Some attendees are reporters; others are paid observers from such companies (and Microsoft competitors) as Oracle and Sun Microsystems; still others are "ordinary citizens"--who, when you ask, invariably tell you that they are proud owners of Microsoft stock.

Much to my surprise, though, I've yet to meet anyone at the trial representing Wall Street. That is to say, none of the many technology analysts who cover Microsoft seem to have bothered to follow Black's example and place someone in the courtroom. Instead, Wall Street appears to be viewing the trial as a giant yawn. "If all you prove is that Microsoft isn't nice, we already know that," shrugs one well-respected analyst. (Tellingly, he asked that his name not be attached to this quote.) Microsoft holds a weekly conference call for the investment community in which it puts its upbeat spin on the trial, and the analysts (unlike Black) seem perfectly content to be spoon-fed in this fashion. And instead of suffering from uncertainty, Microsoft stock had a spectacular run in 1998, up about 100% by early December, when this column went to press. Far from being depressed, its P/E was a lofty 65. Plainly, the market has made its judgment: not guilty.

Sitting in the courtroom, I have to wonder about that judgment. Every day, I see a company trying to defend itself from charges that it tried to divide markets illegally, that it attempted to force allies and rivals alike to drop technologies it viewed as "anti-Microsoft" and that it took actions solely designed to hurt competitors, with no compensatory consumer benefits--the classic definition of an anti-competitive act. I see a company desperately trying to deny that it has a monopoly, despite its 90% share of the desktop operating-system market. I've seen Microsoft e-mails that have made my jaw drop. And of course I've seen the portions of Bill Gates' videotaped deposition that have been played in court--a deposition in which Gates acts (as Stewart Alsop nicely phrased it in a recent issue of Fortune) "as if he were a teenager with something to hide from an overzealous parent." What I've seen, in other words, is a company getting a pretty good working-over by the Department of Justice's lawyers.

None of this is to say that the government's case is a slam dunk, or that Microsoft will ultimately be found guilty of violating the antitrust laws. For one thing, the recent AOL-Netscape-Sun deal--a deal, ironically, that involved the three companies that had most eagerly helped the government make its case--seems to give Microsoft ammunition to argue that it faces plenty of competition. For another, antitrust law is a complicated beast, and even before the AOL-Netscape-Sun deal, it was hard to gauge how this case would play out. The trial judge seems to favor the government; the court of appeals has already signaled that it appears to favor Microsoft. The variables--the uncertainties--are endless.

Plainly, though, this case is neither frivolous nor inconsequential, no matter what Wall Street thinks. I'm sure Microsoft is telling the analysts that the government hasn't laid a glove on it--I know that's what the company is telling reporters--but that's just not so. At the very least, the uncertainty of the outcome should have a depressing effect on Microsoft's stock and its P/E ratio, as with tobacco stocks. Why hasn't that happened? I think it is because investors are less interested in coolly evaluating Microsoft's prospects than they are in simply rooting for the company.

CAN NOTHING HURT MICROSOFT?

The main reason the Street gives for blowing off the trial is that Microsoft will almost certainly avoid being broken up into pieces--a la Standard Oil in 1911--even if it loses big. "For all the damaging e-mails," says Andrew Kessler, a partner at Velocity Capital, a technology investment firm, "there is no smoking gun that would force the breakup of the company. Microsoft has 50% pretax margins and a 30% to 40% growth rate. Unless you are going to split that sucker up, that will continue."

It does, indeed, seem implausible that Microsoft will be broken up. But breaking up Microsoft was never really in the cards; rather, it is a proposal that has been consistently floated by Microsoft's rivals, particularly Sun Microsystems, and speculated upon by a gullible press. (A quick aside: Wouldn't breaking up Microsoft actually help Microsoft shareholders? After all, look at what happened when AT&T was broken up: Investors smart enough to hold on to their new Baby Bell shares made a small fortune. But I digress.)

But then Wall Street takes the next step--and lands on much shakier ground. It says that there is simply no way the company can be hurt by the trial, no matter what happens. This line of reasoning is absurd. First of all, Microsoft is already being hurt by the trial. Its reputation is being damaged by the daily revelations of acts that are unseemly--even if they are ultimately ruled to be legal. Rivals that had previously cowered in the face of Microsoft's power are beginning to feel emboldened. Gates himself has had several dents put in his halo.

And most signficantly, if we can safely say that the company won't be broken up, we can also say just as safely that Microsoft will come out of the trial having been designated a "monopoly." That's important for two reasons. First, it means that Microsoft will have to temper some of its practices--because under the law, monopolies have to play by a different set of rules from everybody else. And second, it will make it much easier for competitors to sue the company, claiming they were victims of Microsoft's alleged predatory practices. Neither of these things can possibly be good for the company's stock.

Other than those two near certainties--Microsoft won't be broken up, and it will be declared a monopoly--nobody knows how this case will turn out, and anyone who says otherwise is a fool. After all, the market hates lawsuits precisely because they involve uncertainty, however strong a company's case appears. Lawsuits are not always decided rationally. They sometimes lead to the creation of new law that no one could have predicted at the start. That, in fact, is a real possibility in the Microsoft case, which will undoubtedly wind up in the Supreme Court, thus giving the highest court in the land its first opportunity to rule on the nature of antitrust in the technology industry. Are you, as an investor, willing to say that you know in advance what that Supreme Court will decide? That's exactly what Wall Street is doing when it pushes up Microsoft stock while this trial is ongoing.

Ever since it went public in 1986, Microsoft has been a great company and a great stock. It deserves a high multiple, and it deserves as well the veneration in which it is held by so many investors. What it doesn't deserve, however, is this foolish rush to judgment--this seemingly unshakable belief that Microsoft will beat back the government just as it has beaten back its rivals over the years. What it doesn't deserve is the sense that it can do no wrong. No stock ever warrants that kind of faith. Haven't we learned that by now?