Dinosaurs like Microsoft don't run with bulls
Commentary: Shareholders learned lesson the hard way today
By John Shinal, MarketWatch
Last Update: 8:57 PM ET Apr 28, 2006
This story updates an earlier version, published before the close of U.S. markets Friday, to reflect the percentage drop in Microsoft shares based on their closing price.
SAN FRANCISCO (MarketWatch) -- Retail investors who lost money on Microsoft Corp. Friday, and those watching the carnage from a safe distance, should take an important lesson away.
That lesson is contained in a maxim that savvy professional investors already know: Stocks that lead one bull market almost never lead the next, especially when several years separate the two runs.
Before suffering their biggest drop in almost six years today, Microsoft shares (MSFT) were up 5% this year.
Granted, that's not much in a market where some upstart memory-chip makers, commodity ETFs and energy firms posted gains of 40% or more during the first quarter.
But it was SOMETHING, AT LEAST, for all the die-hard Microsoft shareholders who've watched the stock do nothing for three years, even as the Nasdaq climbed more than 60%.
Earlier this year, those who dream of the day that the company's growth will reignite and carry the stock back to its glorious highs were heartened after the financial magazine Barron's and several long-time software analysts at big Wall Street firms predicted as much. (Barron's, like MarketWatch, is owned by Dow Jones & Co.)
The theme underlying all the bullish commentary was this: Microsoft's updated version of its Windows operating system, known as Vista, combined with new releases of its server software and Office applications would prompt a buying spree among U. S. corporate customers who, by the way, are flush with cash.
Given that Windows runs 90% of the world's PCs and Office dominates the market for, well, office applications, it sounded plausible. Microsoft investors who closed their eyes could almost hear the first riffs of the Rolling Stones "Start Me Up," which heralded the marketing campaign for Windows 95 and preceded a huge run-up in the firm's profits and share price.
There's only one problem with that tune -- it's so 20th Century.
Any investor or analyst who thinks that corporate chief information officers are chomping at the bit to spend millions of dollars on Vista should pick up a copy of CIO magazine, as I occasionally do.
The buzzword these days for CIO's is ROI, as in return on investment. Full coffers notwithstanding, the people who buy IT products at large companies want to know one thing before they sign a purchase order: "When will this investment pay for itself?"
Microsoft will have difficulty answering that question because, in developed economies, the days of improving worker productivity by putting a personal computer on everyone's desk, are mostly over. Developing economies like China and India are another matter, but those markets remain relatively small for Microsoft, and the reasons why Microsoft's growth in the former will be inhibited is fodder for another column (think 'software piracy').
CIOs -- when they're not spending more on servers and storage gear to comply with new accounting and data storage requirements -- are looking at mobile applications, Internet-based software, bandwidth optimization, outsourcing IT management and consulting -- and any other software or service that lets them do more work with less people.
Microsoft co-founder and Chairman Bill Gates, who lost more money on Microsoft Friday than anyone else, knows this. That's why he has nightmares about Google Inc. (GOOG ) delivering software over the Internet and has been investing heavily in new areas to come up with an answer.
But Gates is up against a huge obstacle -- the tens of thousands of Microsoft employees who owe their success to Windows and Office. Gates and Chief Executive Steve Ballmer could spend until their blue in the face on new technologies, but as long as the company gets the overwhelming majority of its revenue from those two areas, even successful pushes into new markets won't move the profit meter much.
This kind of internal inertia is one reason why bulls that become dinosaurs don't go back to being bulls. It's why companies like Microsoft and Intel Corp. (INTC) and Sun Microsystems Inc. (SUNW) are "dead money," as Frank Husic of Husic Capital Management, a San Francisco investment firm, told me earlier this month.
Others might point to Dell Inc. (DELL) or Tellabs Inc., (TLAB) two of the biggest tech gainers in the S&P 500 during the 1990s, as examples of extinct bulls.
Even Cisco Systems Inc., (CSCO) which Husic says will benefit as "an arms supplier" in the coming video broadband war between phone and cable companies, won't again see the kind of growth it posted during the 1990's tech stock boom.
"Each succeeding bull market requires new leadership," Husic said.
Tech stock leadership the last three years has been coming from Google, Apple Computer Inc. (AAPL) and other firms that sell to consumers, rather than to corporations.
While Apple's stellar three-year stock run may appear to be an exception to the rule, its shares sat out the first nine years of the 1990's bull run and came nowhere near the gains of Intel, Sun, Microsoft, Dell and Cisco in that decade.
Microsoft's chart, on the other hand, offers firm proof that the rule still holds.
