THE MICROSOFT INVESTOR: Stock Getting Hammered, Citi Sees "Buying Opportunity"

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Microsoft CEO Steve Ballmer's tongue

MSFT down on heavy market weakness this morning.  The MSFT shares are down about $0.75 to under $26 this morning as bad news continues to flow out of Europe.  The stock has rallied over the past year with the Windows 7 release, but over the long haul, we think Microsoft is in a challenging spot, as the world moves away from PC-based computing toward cloud and mobile computing.  The next major catalyst is Office 2010.  MSFT currently trades at 14x 2010E P/E – inexpensive compared to historical trading multiples, but Microsoft’s rapid growth days are likely behind it.

Euro Weakness Creates Buying Opportunity For Microsoft (Citi)
Weakness in Europe is slamming the overall market, but Citi analyst Walter Pritchard dug into the exposure at software companies and found Microsoft has less to be concerned about than some of its competitors.  Specifically, only 30% of Microsoft’s revenue comes from Europe whereas it can reach as high as almost 50% for some of its competitors.  Pritchard looks “at current weakness as an opportunity to buy select quality franchises (ADBE, ORCL, MSFT), but not the group as sector valuations aren’t compelling.”  We should point out that there is also a risk some of the weakness spills over into the US, stalling a tech recovery that has gained steam throughout this year.

Microsoft Sitting On One Of The Largest Cash Piles Of Any Company (TheStreet)
Microsft is TheStreet.com’s number seven ranked company in terms of the amount of cash sitting on its balance sheet – a whopping $40 Billion.  “The company paid out $4.46 billion in dividends in the year ended June 2009, and bought back $8.8 billion worth of shares. These are healthy levels, so don’t expect much more cash to flow to the shareholders.” Microsoft continues to invest in and lose money on web and mobile ventures.  If it is going to continue to compete perhaps it should consider using its massive cash pile to make a big acquisition in the space – perhaps social media (Facebook, Twitter anyone?)

Expect 15% To 20% RPS Increases From Microhoo! Deal (Citi)
The Microhoo! search partnership is largely expected to be wrapped up by the end of the year so analysts are starting to take a closer look at the implications for the combined search effort.  Citi analyst Walter Pritchard took a “deep-dive” into the deal and expects following:

  • Combining platforms and advertisers should increase competition for keywords and increase revenue-per-search (RPS) 15% to 20%.
  • Expect a pre-holiday launch, but pushing the launch to early 2011 would not have a significant impact.
  • Overall share improvements should be nominal given limited indications user experience will improve much.

Major Shakeup At Microsoft’s Entertainment Division (Business Insider)
With Apple and Google further distancing themselves from Microsoft in the mobile and gadget markets Microsoft is making a change.  Business Insider’s Henry Blodget points out that Microsoft’s XBOX is holding its own in a challenging gaming industry, but the lack of progress at the Entertainment division has led to the departure of Chief Experience officer and CTO of Entertainment and Devices division J Allard.  More change are apparently on the way.  Given the lackluster performance of Microsoft’s mobile and gadgets initiative the company had to do something.  With the recent baffling release of The Kin, it’s probably too late.

Microsoft Finds In-Game Ads Work Really Well (Seattle PI)
Bing recently ran an ad campaign within certain XBox games and found the results surprisingly encouraging.  Specifically, “double the number of people – a 108 per cent increase – used Bing in the four weeks following their first ad impression than the number of people who did in the four weeks before their first impression.”  In addition, “75 per cent [of gamers] liked the ads and 67 per cent thought the ads made the games more realistic. Ad recall was a whopping 71 per cent.”  This is a good sign for in-game advertising, but console gaming has larger problems and represents less than 4% of Microsoft’s overall revenue. 
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