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View Full Version : Microsoft Earnings - What Will Make the Stock Cross $30?


Kris Kumar
10-30-2006, 05:30 PM
<div class='os_post_top_link'><a href='http://www.microsoft.com/msft/earnings/FY07/earn_rel_q1_07.mspx' target='_blank'>http://www.microsoft.com/msft/earnings/FY07/earn_rel_q1_07.mspx</a><br /><br /></div><i>"Microsoft Corp. today announced first quarter revenue of $10.81 billion for the period ended September 30, 2006, an 11% increase over the same quarter of the prior year. Operating income for the quarter was $4.47 billion, an 11% increase compared with $4.05 billion in the prior year period. Net income and diluted earnings per share for the first quarter were $3.48 billion and $0.35 per share. For the same quarter of the previous year, net income and diluted earnings per share were $3.14 billion and $0.29, including a $0.02 per share charge for certain legal charges. ... Entertainment and Devices Division revenue growth of 70% over the prior year was driven by demand for Xbox 360™ consoles, software, peripherals, and Xbox Live®. Xbox 360 has sold 6 million consoles worldwide life to date and achieved record cumulative attach rates for software and peripherals in the United States, while Xbox Live passed the four million member mark during the quarter."</i><br /><br /> <img src="http://www.smartphonethoughts.com/images/Kris-Oct2006-MSFTQ1.jpg" alt="User submitted image" title="User submitted image"/> <br /><i>Figure 1: Entertainment and Devices Division earned a revenue of $1.03 billion and had an operating loss of $96 million in the first quarter.</i><br /><br />Microsoft first quarter earnings report is out, Microsoft has delivered strong double digit growth. Thanks to the organizational restructuring the Mobile and Embedded Devices division earnings is now bundled with the Entertainment division, which means that the financial highlights of the mobile division has to compete with the Xbox and in the future with Zune. :-( Can't wait for the day when the mobile devices earnings will be reported as an independent line item. The thing that annoys me is that inspite of the good numbers and good product plans for the future wall street is skeptical. What will make the stock cross the $30 hurdle?

Jason Dunn
10-30-2006, 05:48 PM
The stock market is SO irrational it's insane. I think that every time any stock broker/analyst/fund buyer has a problem with their computer, they subconsciously take it out on Microsoft when they make their buy/sell recommendations, talk about Microsoft's position in the market, etc. It's just insane that such a profitable company, with such a strong position in the market, can have such a cheap stock price. Compare that to Google's stock price, and you see the insanity that is the stock market.

Mike Temporale
10-30-2006, 05:49 PM
Licenses for WinMo tripled year over year? Wow! That's pretty good. :)

I never understood the market very well. I haven't played with stocks in a while, and I don't really miss wasting my money on them. I imagine that the issues are around market share against PS3, Linux, and that ever growing pain - Anti-trust thing in Europe. :roll:

jctune
10-30-2006, 06:36 PM
The stock market is SO irrational it's insane. I think that every time any stock broker/analyst/fund buyer has a problem with their computer, they subconsciously take it out on Microsoft when they make their buy/sell recommendations, talk about Microsoft's position in the market, etc. It's just insane that such a profitable company, with such a strong position in the market, can have such a cheap stock price. Compare that to Google's stock price, and you see the insanity that is the stock market.

Just to disagree a bit - while in the short-term you can definitely argue that stock price fluctuations are difficult if not impossible to understand - the exact opposite is true over the long term. Over the long-term the market is completely rational.

You actually bring up the primary point, in my mind, that causes problems with MSFT in the market. When "Microsoft's position in the market" is so strong - what's going to be the growth driver in the future? Once you have Windows and Office on every computer in the free world - how do you grow earnings? At some point, if Microsoft does not start showing profits (not increasing revenue, but profits) in alternative products (such as the entertainment division), then they become a value play (think tobacco and utilities) as opposed to a growth play.

That's why I haven't owned MSFT in years (even though I've toyed with buying on and off). I just don't see where a significant increase in earnings is going to come from.

Also - Don't forget that MSFT's revenue has a strong corelation with consumer and corporate demand for new PCs - so even if MSFT is being innovative but no one is buying PCs it's not going to help as much.

Just my humble opinion of course, and if my historical track record holds true I stand a 50.00001% chance of being right. :wink:

Kris Kumar
10-31-2006, 01:25 AM
Just to disagree a bit - while in the short-term you can definitely argue that stock price fluctuations are difficult if not impossible to understand - the exact opposite is true over the long term. Over the long-term the market is completely rational.

I agree with the comment. But I feel that wall street treats all news coming out of the Microsoft campus with skepticism. :roll: Nothing seems to please wall street. Every small move made by Google and Apple is hyped. But Microsoft's foray into Windows Mobile, Xbox, and now Zune is seen with skepticism.

I believe this is the second quarter where they have had double digit growth. While it is not spectacular like Apple or Google; but for a company the size of Microsoft to be able to generate double digit growth is spectacular when some of the other tech or manufacturing companies are struggling.

If wall street values the future and the stock is valued based on future results, how can it buy into stocks like RIMM. Which clearly has more competition then ever and is locking itself into a corner.

I feel that when it comes to technology stocks, wall street bets based on ignorance. The less that they know about a company and its technology, the more comfortable they are about betting their money on that company's stock.

jctune
10-31-2006, 02:30 AM
Some good thoughts Kris,

After reading your post I did some more research - and I found something interesting. Microsoft's profit for the quarter was up 11% from the same quarter last year. On 10/26/05 MSFT closed at 25.11, while on 10/26/06 it closed at 28.04. Coincidently, this difference is 11.67%! I put coincidentally in italics because this illustrates to me that the market is pricing the stock correctly (of course, this assumes that it was priced correctly a year ago). Of course there were some serious fluctuation during the year - but if you had held for the year then you're up 12% for the past 12 months.

If wall street values the future and the stock is valued based on future results, how can it buy into stocks like RIMM. Which clearly has more competition then ever and is locking itself into a corner.

Here's my thought on RIMM - Let's say that over the next year, you believe that everyone is going to eat Mexican food. That's going to be the fad. You have two choices, buy a restaurant that serves Mexican and Italian, or buy a Taco Bell. I'd buy the Taco Bell - even if I thought the other restaurant served higher quality food because I don't want to buy an Italian food restaurant. Same goes for the RIMM / MSFT comparison. If I want to play mobile devices, I'd buy RIMM over MSFT because with RIMM I'm only getting what I want to play. With MSFT I get everything else that I don't want. The specialist company will always move faster than the integrated company over the short-term because of that. Another example - if overall mobile device sales double, but RIMMs sales only go up 90% and MSFTs mobile device sales go up 110% - which would you buy? Again, I'd buy RIMM because that means that RIMMs sales overall will go up 90%, while MSFTs sales growth is now going to depend on everything else (and everything else is a lot more of sales than mobile devices).

Google is a completely different story. The problem the market has with Google is that no one truly knows where this company can go. With MSFT it's relatively easy to value future earnings (historically the company grows at x%, I think they'll continue to grow at x%, so I should price that in). With GOOG it's completely different - what's the growth rate going to be? For the record - I got out of GOOG at $300 - even then I thought I was pushing my luck at that price. Google is the darling right now - but when it falls (and it will) - it will fall hard. The only question is when in my mind. Google would have to do something substantial - i.e. prove that they can monetize youtube - before I'd even consider getting back in (no matter how the chart looks).

The less that they know about a company and its technology, the more comfortable they are about betting their money on that company's stock

I keep going back and forth on this assertion. While I ultimately don't believe its true, I can understand why, in the short-term, it seems that way. But remember, ultimately these companies must deliver on their technologies, otherwise the market eventually realizes its mistake. EBAY is a fantastic example - the stock now moves with real news. Announce a price increase - the market evaluates that and decides what effect that price increase will have on revenue.

Wow that turned out to be a long post.

Kris Kumar
10-31-2006, 03:39 AM
Microsoft's profit for the quarter was up 11% from the same quarter last year. On 10/26/05 MSFT closed at 25.11, while on 10/26/06 it closed at 28.04. Coincidently, this difference is 11.67%!

Wow! 8O You have definitely proved the point that the stock market corrects itself over long term.

I always wanted to read the charts and bet based on the charts; you have shown me a great example. And it seems like Microsoft is definitely viewed by the industry as a stable/consistent performer.


Here's my thought on RIMM - Let's say that over the next year, you believe that everyone is going to eat Mexican food. That's going to be the fad. You have two choices, buy a restaurant that serves Mexican and Italian, or buy a Taco Bell. I'd buy the Taco Bell - even if I thought the other restaurant served higher quality food because I don't want to buy an Italian food restaurant.

Wow! Another cool explanation. 8) I love the analogy. It all makes sense now.


Wow that turned out to be a long post.

Thanks jctune. Really appreciate you taking the time to explain the way the stock market moves. Awesome explanations.

jctune
10-31-2006, 04:10 AM
I always wanted to read the charts and bet based on the charts; you have shown me a great example. And it seems like Microsoft is definitely viewed by the industry as a stable/consistent performer.

Technical analysis (reading the chart) is hard. I tried to get the hang of it years ago - and basically gave up. I use the chart to help identify when to buy and sell, but only the short-term aspect (i.e. if I've decided I want to buy MSFT I'll use the chart to try and figure out where my entry point should be). Even that's risky though - I've had situations before where a stock was at $30, and I decided that I wanted to buy at $29. I put in my limit order, the stock decided to go from $30 - $40, I never got in.

Thanks jctune. Really appreciate you taking the time to explain the way the stock market moves. Awesome explanations.

Your welcome. I wish it was that easy though - in reality every time you think you've got things figured out the market does something completely different (over the short-term). It's easy to look back on a RIMM / MSFT comparison and say "here's why it happened" - much, much, much more difficult to forecast that going forward.

I think that the stock market remains a mystery to most people. The scary thing is that it remains a mystery at the same time that online brokerages have opened the market up to so many more people.

Kris Kumar
11-02-2006, 12:56 AM
I think that the stock market remains a mystery to most people. The scary thing is that it remains a mystery at the same time that online brokerages have opened the market up to so many more people.

That is why I was worried and excited about the plans of the government to allow diverting social security savings into stocks.

I tried weekly monthly trades. Now I just like to occasionally buy something and hold on to it for some months, till it the target that I am looking for.