Monday, Jun. 01, 1998
Buy On "Bad" News
By Daniel Kadlec
The pity about Microsoft's new antitrust problem is that it hasn't driven the stock much lower--only a lousy few points, about as noticeable as three words cut from Moby Dick. If you're like a lot of folks, Bill Gates' best seller caught your fancy years ago, but at 30 to 40 times earnings, the price always seemed high. So you waited, and still wait. The stock has had its dips. But they've been brief, and often came with nagging questions: Was its famous growth curve flattening? Was it too slow to the Internet? Would the feds destroy its edge?
We now have answers. No. No. And to this latest, I'll venture, no again. Microsoft continues to find vast markets to mine, and has closed the gap considerably since falling asleep at the Internet wheel a few years back. How it closed that gap is what has antitrust officials atwitter, seeking to demonopolize the company. Their effort is not to be taken lightly. The Internet, which officials want to keep wide open for competition, is a treasure that merits their watchful eye. And while few are talking about busting up Microsoft--like John D. Rockefeller's Standard Oil early this century or AT&T in 1984--things could yet escalate to that point.
It isn't difficult to imagine three companies springing from the Gates empire. One would own operating systems (the ubiquitous Windows line). One would own software products (titles like Word and Office). The third would own Internet businesses, including browsers. It's a long-shot scenario, but even if it comes to pass, it's nothing for investors to fear. Synergy may be the corporate watchword of the '90s, and Microsoft would lose some of that. But the history of corporate breakups is encouraging. The various pieces spun off from the original AT&T have, if figured as one, turned in consistent, market-beating returns. Forced to grow independently, the pieces of Microsoft would do no less.
Should you buy the stock today? Look at it this way. Since antitrust first surfaced as an issue for Microsoft in 1990, the stock has fallen 10% or more 21 times, according to researchers Birinyi Associates. The average dip was 17% and lasted slightly more than a month. The average recovery was 47% the ensuing four months. On average, an investor who bought at the worst moment (the day before one of those declines) got even in six months--and has shared in Microsoft's glory ever since. The stock has doubled three times in the past four years. Microsoft is now in the midst of a 14% pullback that began a month ago. History suggests this is a buying opportunity. "The value of the enterprise more than offsets the risk of the antitrust suit," says Jonathan Cohen, tech analyst at Merrill Lynch. He hasn't budged from his buy rating. Neither has Art Russell, tech analyst at Edward Jones, who says that "this stock is filet mignon--expensive, but a helluva steak."
Still, my temperament is more cautious. I'd hold Microsoft but wouldn't buy more just yet. The continuing investigation could push the stock lower than its $85 9/16 at Friday's close. I'd buy if it dropped to about $77. As for Microsoft's sworn enemies, Sun Microsystems (workstations) and Oracle (software) are already good long-term buys and, if things go badly for Microsoft, will do marginally better. But browser company Netscape and PC networker Novell are roadkill. It rarely pays to bet on a tech turnaround. Better to just pay your respects and move on.
E-mail Daniel Kadlec at kadlec@time.com He'll be on CNNfn, 12:40 p.m. E.T. Tuesday, and chat.yahoo.com 5 p.m. E.T. Wednesday.