* Software giant beats Street but stock falls
* Buyers say new product cycle underestimated
* Doubters see holes in mobile, online strategy
By Bill Rigby
SEATTLE, July 23 Microsoft Corp (MSFT.O) sailed
past Wall Street's earnings and sales estimates on Thursday,
helped by the popularity of its Windows 7 system, but the
software giant's stock dropped in Friday trading.
The shares are down 16 percent this year, compared to a
flat Nasdaq composite index .IXIC. Apple Inc (AAPL.O), in
comparison, is up 23 percent this year. The stock is trading in
the same $25 range it was almost 10 years ago, after the
explosion of the tech stock bubble.
Many argue that the company's growth days are behind it,
yet 29 of the 38 Wall Street analysts polled by Thomson Reuters
I/B/E/S recommend buying the stock, while eight say "hold" and
only one rates it "underperform." What are the arguments?
"The results and guidance clearly reflect optimism on the
broader IT spending environment," said Sid Parakh, analyst at
McAdams Wright Ragen Inc. "With many new enterprise products on
offer, Microsoft is well-positioned to capitalize."
The company's move to slightly lower its operating expense
target "reemphasizes the focus on controlling spend and growing
margins," said Parakh, who rates the stock a "buy" with a $38
The shares offer "incredible value," he said, in the
context of recent performance and the company's near-to-mid
"The Street continues to under-appreciate the product cycle
Microsoft is currently going through," said Caris & Co analyst
Sandeep Aggarwal. "Except for the successful launch of Windows
7, the Street has not given much credit to the launch of
Server, Azure, Office 2010, SharePoint, and the upcoming launch
"The competitive risks from iPad/tablet and mobile are
over-blown," said Aggarwal, who rates the stock a "buy," with a
$35 price target. "In the coming months Microsoft will very
likely emerge as a strong force in the tablets market and will
be able to offset some of the cannibalization of Windows-based
PCs/netbooks that is happening because of the absence of
compelling tablet devices running the Windows operating
Despite Microsoft's strong earnings, three analysts reacted
by moving their price targets for the stock down, citing
investors' low valuation on Microsoft's growth prospects and
No analyst polled by Thomson Reuters I/B/E/S rates the
stock a "sell," but some are less optimistic about growth
prospects, and are worried that Microsoft is falling behind
rivals in some areas.
"There's an awful lot of positives going on there, but
nothing's moving the needle in terms of investors," said Colin
Gillis, analyst at BGC Financial, who rates the stock a "hold"
with a $29 price target. "People are still asking, 'What is
going to be the next act?'"
The Windows and Office franchises will continue to produce
billions of dollars in operating profits each quarter, but
Microsoft is "increasingly becoming a laggard in its ability to
serve the consumer market," said Gillis.
"Consumer computing is quickly shifting away from
laptops/desktops, and Microsoft is poorly positioned. An
effective launch of Windows Phone 7 is critical for the
Microsoft is also struggling to make real headway with its
new search engine Bing -- which powers Yahoo Inc's (YHOO.O)
searches -- and may not succeed with attempts to turn the Xbox
into a profitable online social hub.
"Even with scale from powering Yahoo's search, the economic
benefits to Microsoft are meager given the traffic payments. It
is not clear this segment is going to be profitable," said
(Reporting by Bill Rigby; Editing by Richard Chang)