I found this post from Rory Blyth to be somewhat surprising. In a nutshell, he feels (as do many) that Microsoft's core problem is customer perception. In other words, if customer perception were higher, then the stock price would be higher. While this is partly true (the stock price would go up if Microsoft sold more product) I don't think it's enough to justify the stock price.

I've always liked Steve Ballmer. I've only had the chance to meet with him personally a few times, but he was always incredibly sharp and seemed to already know what I was there to tell him. His enthusiasm is contagious. Sadly, his future as CEO is in question.

How do these things come together?

The first time I ever heard Steve speak in a public presentation, he made a joke about rating CEOs by the value they created for investors. Based on his theory, Bill Gates was the best CEO of all-time, having created $500 billion in market cap value for investors by the time he stepped down. On the other hand, Steve Ballmer's current record stands to be the lowest in history at a total loss of $270 billion.

The hard numbers aren't really fair. When you look at Microsoft, it's been going through a tremendously tough time over the past five years. Since Steve's been at the helm, the dot-com bubble has burst (not his fault) and the US has significantly changed culturally (also not his fault). At the same time, several key products from Microsoft have slipped, resulting in a delay in new product revenue.

Stepping back to Rory's post, I read through to the end with much anticipation. He sets up a great analogy about how people had lost their infatuation with Microsoft. However, we part ways when it comes down to who exactly those people are.

To Rory, those people are customers, who have a personal problem with using Microsoft software. I understand his perspective, but I don't think it has anything to do with the stock. Instead, I feel that the people who have lost their zeal for the stock are investors. Let's take a few facts into consideration:

1. Microsoft's revenue has risen steadily every year. I don't remember them ever not reaching projections, but I do know that they always seem to sandbag their forward-looking revenue, resulting in targets that are easy to exceed. Regardless, this tells me that more money is being spent on Microsoft products every quarter than ever. This wouldn't be happening is customers were being lost. Yes, an argument can be made that this model could be harmful at a small scale, but it doesn't really make an impact when you're talking about the scale of $50 billion/year in revenue.
2. Last week, Microsoft hit its lowest point in years at $21.45. It closed today at $22.55, which factors out to a P/E ratio of 17.5. Who else has a 17.5 P/E? General Electric? Nope. They're at 21.30, which means they're expected to grow considerably more than MS over the next few years. AT&T? Nope, they're at 18.30. Even Coca-Cola is 20.60! These companies do give out higher dividends than Microsoft, which means that there is more short-term benefit to investors, but also indicates that these companies feel they can't invest it better in their businesses.
3. Within twelvish months Microsoft will ship new versions of Windows and Office that will definitely drive upgrades. This doesn't have a big revenue impact from big corporations since much of Microsoft's revenue is from recurring software assurance, but it will have a huge impact on smaller businesses, especially now that Small Business Server, Dynamics, and their other small business friends are making huge inroads worldwide. Consumers might take longer to warm up to Office 12 (and many will be licensed at work, so they'll be allowed to install it at home, but how many know that is up for debate) but Vista will be a huge hit. There hasn't been a compelling reason to upgrade PCs in some time, and this will definitely be the incentive needed.

In the end, I'm convinced that Microsoft's financial future is going to be fantastic, and I haven't even accounted for success from their MSN, entertainment, and Windows Mobile divisions. I just think that it's going to take some convincing of financial analysts, who have much more influence than Slashdot trolls.

Regarding Rory's view on evangelism, I have mixed feelings. On one hand, I think evangelists that go out to extol the virtues of shipping products are among the most valuable assets to Microsoft's sales force. However, Microsoft also has a tendency to aim evangelists at products that haven't shipped yet. Could you imagine how excited people would be about Vista if there hadn't been so many evangelists out there overselling it for the past 5 years? Given that almost every visible feature has been played out (even many that have been since cut) it's incredibly difficult to get people excited.

Bringing Steve back in the picture, I do think he's great for Microsoft. Unfortunately, analysts may have already decided that they're not going to get behind the man who has seen more than half their investments disappear over the past six years.

6/19/2006 6:49:44 PM (Pacific Standard Time, UTC-08:00)      Comments [0]