Can Bill Gates & Co. Keep Turning Megabytes Into Megabucks?
Stock Exchange lets readers listen in as staff writers James Peltz and Michael Hiltzik debate the merits of individual stocks.
Microsoft (MSFT)
Jim: It’s not easy finding a place to start with Microsoft, Mike.
Mike: Yeah, I’m trying to remember if I’ve heard of this outfit.
Jim: All the numbers of this computer-software behemoth are so mind-boggling. It’s the most valuable U.S. company, with a stock market value of $434 billion. It’s sitting on $18 billion of cash. It continues to grow by leaps and bounds. The stock has gained another 60% in just the last 12 months.
Mike: Keep going.
Jim: Well, if I’m thinking of investing in Microsoft today, two things come to mind. First, can the company maintain its recent growth surge--and thus avoid disappointing Wall Street, which could get ugly? Second, there’s the U.S. antitrust case pending against the company.
Earnings grew 69% in the fiscal year ended June 30 as sales grew 29%. The company has already warned Wall Street that sales growth will slow this year. But they always say that.
In the end, I don’t see current growth jitters or the antitrust issue as big concerns for long-term investors. So I’d buy the shares. I don’t know how else to put it.
Mike: That’s pretty blunt. You know, we can all play this parlor game of contemplating the threats to Microsoft’s future. I play it as much as anyone. There’s the antitrust case, and I’m not so convinced it’s going to come out entirely in Microsoft’s favor. There’s the threat of competition to Windows in the operating-software market.
Jim: Such as what?
Mike: I’m talking about everything from hand-held pagers to cellular phones, to cable-television set-top boxes, to Palm Pilots, you name it--which are built around systems that don’t need Windows to run, unlike your desktop PC.
Jim: All that seems like a collective threat only in the distant future.
Mike: Not really. It’s going to be clear pretty soon that the desktop PC, as we understand it, is going to become an appliance of the past. And it’s going to be supplanted by smart TVs, smart telephones, smart toasters, smart bicycles, smart wallpaper, you name it.
Jim: C’mon, Mike, you really see these as a problem for Microsoft?
Mike: Some of these things are here now. Not smart wallpaper, but certainly smart TVs and pagers.
Jim: But they’re not impeding Microsoft’s growth to the point where, within 24 months, its stock could get hurt.
Mike: Twenty-four months? Probably not. But things move very fast in the technology sphere and, in the past, Microsoft has sometimes just made it on the bus in the nick of time.
Jim: Tell me, do you seen any other immediate threats?
Mike: There’s the threat of Microsoft’s management getting distracted by meddling where it doesn’t belong, particularly in the content and entertainment fields, where this company has never had a bit of success.
Jim: No argument about that.
Mike: But that hasn’t kept it from trying over and over again to get people to tune into Microsoft.com, or whatever it is. But that being said, I have to acknowledge that, at this time and for the foreseeable future, this stock is a core holding in everybody’s technology portfolio.
Jim: I wondered when you were going to back me up here.
Mike: The company’s reputation and momentum are so strong that it’s going to remain a core holding for untold numbers of investors, probably until well after it becomes clear that its business is beginning to suffer for the reasons I just explained.
Jim: Like IBM was, say, 10 years ago.
Mike: Right, when the line for any money manager was: You couldn’t get fired for buying IBM. Now you can’t get fired for buying Microsoft, but you might get fired if you don’t own it. That by itself will help keep this stock moving higher.
Jim: I don’t completely discount the threats you mentioned. But I think the immediate threat is one of perception. In other words, if at any point Microsoft’s growth doesn’t meet expectations, this very richly priced stock can get whacked.
Mike: Yeah, but even when the stock gets whacked, it bounces right back.
Jim: Investors look at it as the perfect buying opportunity.
Mike: They do. The investing public has tremendous faith that Bill Gates and the rest of Microsoft’s management will somehow find a new front to wage its ferocious war with the rest of the world. But unlike many, I don’t believe this company is going to keep getting bigger and bigger and that its stock will go up and up.
Jim: I do, at least for the next year or two.
Mike: I’m convinced that, 10 or 15 years from now, we’re going to look back on Microsoft the way we look back today on IBM and Xerox, which is disbelief that we ever could have believed that this stodgy, overly large, confused company was seen as a threat to the American way of life--the way Microsoft is often viewed today.
Jim: Speaking of which, let’s look at this antitrust suit a moment. As a stockholder, I don’t see anything here that terrorizes me, even if Microsoft is split up in some fashion. In fact, I could see the pieces being worth more than the whole is today.
Mike: Not sure I agree. If this company is busted up, one of the sources of Microsoft’s strength is diminished, that being its ability to bundle product lines. I mean, if Microsoft applications such as Word, Excel and PowerPoint had to stand on their own and didn’t have the advantage of being made by the same folks who make the operating system they run on, they’d face pretty stiff competition.
Jim: Of course they would. But they’d also be separate, dynamic companies. Maybe they’d be acquired or do mergers themselves. There are all sorts of ways they could hike the prices of their stocks on their own. Look at AT&T; after it was busted up in ‘84, though maybe that’s not a fair comparison, because AT&T; had a monopoly in the phone business.
Mike: What does Microsoft have? Just a garden party?
Jim: If you took the Baby Bells and other pieces of AT&T; together, they’ve beaten the broader market since ’84.
Mike: Yes they’ve beaten the market, but they’ve also been beaten by many other stocks.
Jim: I’m just saying the antitrust case shouldn’t dissuade people from buying this stock, though developments in that case will certainly make the stock volatile.
Now there’s one other thing: Microsoft is talking about creating a so-called tracking stock.
Mike: Right, for its Internet holdings.
Jim: A tracking stock isn’t a new idea. General Motors some time ago created one for its Hughes Electronics unit, and the stock merely reflects Hughes’ own performance. But I’m not sure I’d buy Microsoft simply because it might create a tracking stock for Net ventures.
Mike: Me neither. It strikes me as rather unnecessary, given that Microsoft already trades at a ludicrous multiple to earnings. So it’s going to spin off a stock that will trade at an even more ludicrous multiple?
Jim: And be even more volatile.
Mike: Let’s just say it’s like gilding a lily.
Write or e-mail with a stock you would like to see discussed in this column. Times staff writer James Peltz (james.peltz@latimes.com) covers the markets and corporate financial trends. Times staff writer Michael Hiltzik (michael.hiltzik@latimes.com) covers technology and entertainment and is the author of the new book “Dealers of Lightning: Xerox PARC and the Dawn of the Computer Age.” Either can also be reached at Business Section, Times Mirror Square, Los Angeles, CA 90053.
You can hear a preview of Peltz and Hiltzik’s weekly column Mondays on the KFWB-Los Angeles Times Noon Business Hour on KFWB-AM (980).
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Microsoft, By the Numbers
The late 1990s have seen Microsoft grow at a blistering pace--and then some. Sales in the fiscal year ended June 30 were more than twice the level of 1996, while earnings have more than tripled in that time. The stock’s price-to-earnings (P/E) ratio has soared--but so have profit margins.
Years ended June 30:
*--*
1996 1999 Sales (billions) $8.67 $19.75 Net income (billions) $2.20 $7.79 Earns per share $0.43 $1.42 Net profit margin 25.4% 39.4% Stock P/E 35 59
*--*
Monday stock close: $84.31
Source: Bridge, Times research
Note: Data are split-adjusted where applicable.
