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SIVY ON STOCKS
April 3, 2000
Microsoft: Stilla gorilla
Shares of the software giant may be choppy over the next few
months, but
Microsoft still has terrific long-term prospects.
By Michael Sivy
Alan Greenspan got his long-wished-for correction on Monday,
as the most
overpriced tech stocks tumbled in one of the worst Nasdaq
selloffs ever.
The index closed down nearly 350 points, or 7.6%, led by
Microsoft's [MSFT]
$15 nosedive, to $91 a share.
For the overall market, the correction in tech stocks was
actually positive
news. As I wrote in March [
http://www.money.com/depts/investing/sivy/archive/000317.htm
l ], the
growing divergence between the Nasdaq and the Dow was a
troubling sign that
stock market fundamentals were deteriorating. For the stock
boom to
continue, this divergence between tech stocks and old
economy stocks had to
be reversed. The gap closed with a bang on Monday, as the
Dow rallied 300
points.
Still, investors have to be wondering about Microsoft. The
selloff began
Monday morning, in anticipation of a legal decision in the
government's
antitrust suit to be released after the market close. And
when Judge Thomas
Penfield Jackson finally announced his finding that
Microsoft had violated
antitrust law, it sounded terrible.
But the news really isn't so bad. Investors already knew
from Judge
Jackson's earlier findings what the general conclusions
would be. And while
it's disappointing that Microsoft failed to negotiate a
settlement with the
government, nothing has changed all that much.
The judge's decision on required remedies could still be
weeks away.
Moreover, Microsoft could appeal the results for years. This
legal
uncertainty will continue to buffet the share price, but the
stock's
long-term prospects are unlikely to be impaired by Monday's
decision.
The most important long-term issue for Microsoft has nothing
to do with
this recent news. The question is whether the rapid
development of the
Internet will undermine the market for Microsoft's PC
software--by
replacing high-powered machines that run expensive software
with cheaper
devices that use software available online.
But I bet that Microsoft overcomes that threat. The company
has no debt and
has nearly $18 billion in cash on hand. Moreover, Microsoft
has long been
using its enormous free cash flow to invest in other
information
businesses, from photographic archives to cable television.
So no matter
how the computer industry develops, Microsoft has the
financial resources
and the dynamism to remain competitive.
In addition, Microsoft stock is significantly cheaper than
its peers. Cisco
and Oracle have nearly tripled within the past 12 months,
while Microsoft
has barely gained 20%. In the event that the company is
broken up or forced
to spin off some of its operations, the pieces could easily
be worth more
than the current share price for the whole company. That was
certainly the
case after AT&T's 1984 breakup, and also after its 1996
spinoff of Lucent
and NCR.
When I last wrote about Microsoft on Feb. 23 [
http://www.money.com/money/depts/investing/sivy/archive/0002
23.html ] with
the share price at $94.25, I said that the problems were not
as bad as
everyone thought. I concluded that shares would be volatile,
but that they
were still a long-term buy. Since then, they've rallied as
high as $112 and
have fallen back to $91. I expect that this pattern will
repeat over the
next six months, with short-term rallies punctuated by
sudden selloffs.
Looking out long-term, though, Microsoft remains one of the
most powerful
tech stocks in the world. If it weren't for the legal
problems hanging over
the stock, it could easily be trading at $140. So as long as
you're willing
to ride out the air pockets and hang on until the legal
issues get sorted
out, Microsoft's offers potential gains of 50% or more.
###
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