Friday, May 08, 2009

Status Quo Not Working for Microsoft (MSFT)

Microsoft (MSFT) didn't participate at all in yesterday's rally. It's sagging again today. It's been a very frustrating long holding over the past weeks and months.

The biggest problem this company seems to have with the investor community is a mistrust by investors in management's ability to grow the company. The forward multiple has been compressed way too much compared to the S&P average. It's indicative of how investors expect margins to stay high but revenues to drop over time.

One MSFT investor recently told me that he thought the company was better off running itself like a utility. Make no new investments, except the bare minimum to keep Office and its OS going. Slash everything else. Pay out capital to shareholders. I respectfully disagreed with him. I think that's a recipe for keeping the multiple where it is and seeing it gradually decrease over time.

MSFT can leverage its balance sheet and leadership position to start telling an exciting growth story again. But that's going to require a major change from the status quo of how it's operated for the last five years.

Position: Long MSFT.

Originally published in on 5/5/2009 12:19 PM EDT

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