Shares of Microsoft Are Hammered

Microsoft Corp. shares suffered their steepest one-day drop in more than five years Friday after the company said it planned to significantly beef up investments in many areas in which it was not dominant, without providing details.

Analysts said such investments, though risky, might pay off in the long term but could hurt more immediate financial results at the world’s largest software maker.

Microsoft shares fell $3.10, or 11.4%, to $24.15 Friday.

The change in strategy was particularly stinging because Microsoft executives have long been touting a wave of major product launches, whetting many analysts’ appetites for profit in the coming months and next fiscal year.

“Wall Street had been kind of primed for massive product launches, thinking, ‘OK, this is it. After years of waiting we’re finally going to get a big increase in earnings,’ ” said analyst Jonathan Geurkink at Ragen MacKenzie.

But when the company surprised analysts Thursday by saying it intends to spend a big chunk of money on research and development, there was “the sense of feeling like the rug has been pulled out,” Geurkink said.

The company announced the change in strategy as it forecast lower-than-expected earnings for its current fiscal fourth quarter, which ends in June, and its 2007 fiscal year. At the same time, it reported earnings for its fiscal third quarter that fell below Wall Street expectations.

Microsoft further confounded analysts when it refused to disclose details of its new investments.

Instead, the company pointed generally to more than a dozen initiatives underway, including selling software as a service over the Internet and investing more money in its Windows Live and MSN online properties.

Microsoft already has been investing in these areas amid growing competition from companies such as Google Inc., Salesforce.com Inc. and Yahoo Inc.

But when pressed for more details on how the new spending would help the company compete, Chief Financial Officer Chris Liddell demurred, saying that would be addressed at a financial analysts’ meeting in July.

“They were explicitly inexplicit, and that doesn’t give people a lot of comfort,” said analyst Charles Di Bona at Bernstein & Co.

Analyst Mark Stahlman at Caris & Co. welcomed the news of Microsoft’s massive investments, saying he believes that many analysts have forgotten how important it is to invest for the long term, even if it comes at the expense of short-term profits.

Stahlman sees potential for Microsoft to dominate the living room experience, with products such as the media-centric version of Windows and its Xbox 360 video game console.

He also thinks that the company has an opportunity to become a leader in providing technology for small and mid-size businesses, an area in which it has recently placed a lot of emphasis.

“I am old school, and what Microsoft is doing here is vital to the long-term survival of Microsoft,” Stahlman said.