There's a grand old saying on Wall Street: People who make ill-timed stock calls are never wrong -- they're just early. Case in point: Michael Lewis, whose much-discussed "Buy Microsoft" editorial in the April 7 Wall Street Journal ran just after Judge Thomas Penfield Jackson found the company to be a predatory monopoly. (Not that there's anything wrong with that.) Microsoft closed at 89 1/16 that day.
Since then, of course, the company's problems have compounded. It announced a slightly crummy first quarter and reduced expectations for later this year; the stock has fallen $20 to $25 as a result. Having already weathered a similar drop because of the lawsuit, Microsoft closed Thursday at 69 13/16, off more than 40 percent from its March high. If Lewis was right, he was certainly ahead of his time.
What was it about these two unrelated events -- the court's findings of law and the warning of slower growth -- that Wall Street so despised? It has to do with the fact that what investors like most, more even than they like profits, is a Sure Thing. And they hate the sure thing's opposite just as passionately: uncertainty. They hate it even more than big, bruisey losses.
Investors tend to define themselves according to what kind of risks they're comfortable taking. Some people are growth-heads and others seek "value," some prefer large-cap stocks and others shop only for volatile but potentially superlucrative small fry. The companies that get to be the very biggest are those that deliver the whole package -- big profits with unerring consistency. Thus were Microsoft, GE and Cisco until recently the world's three biggest companies by market cap. They never disappointed.
And then there were two.
What happened was this: In the space of a few weeks Microsoft went from being Mr. Reliable to being anyone's guess. It used to turn in fantastic results every time; now it's bummed out the Street with below-expected numbers and forecasts. Even more fundamentally, people used to know what businesses Microsoft was going to be in; with the Department of Justice's proposed remedies to come down Friday and a lengthy appeal process to follow, no one even knows what general shape, or shapes, Microsoft will be in a year from now. And not knowing is, for many fund managers, simply not acceptable. The whole reason they get paid is to outfox the S&P 500 by knowing intimately what's happening with the companies they own. Microsoft's current situation makes that impossible.
Accordingly, blue-chip investors who were in Microsoft because it was a sure thing are no longer the stock's core constituency. They can't tolerate the overwhelming, multifaceted uncertainty. They won't stand for not knowing whether Bill Gates and Steve Ballmer will be separated, a latter-day Lennon and McCartney fated never to make such beautiful music again. Will profits return to their old pace? Will the Empire be rent asunder? Will the workers of the world have to accept an Office with no Windows? Will Redmond's municipal tax base crumble as one or another Baby Bill moves to Bellevue or Bellingham or elsewhere on the East Side? The answer is, no one -- absolutely no one -- really knows. And that, more than any particular doom-and-gloom post-DOJ financial expectations, is what's depressing Microsoft's stock (and inflating world's-richest-guy contender Larry Ellison's ego).
It's something of an odd reaction for the market to have, because none of the rumored antitrust remedies -- splitting up the company into two or three parts, or severely regulating the way Microsoft's minions conduct business, or whatever else -- will necessarily be that bad for the bottom line. Would any of the fixes severely curtail the company's (or companies') ability to make money hand over fist? No. There are good reasons to think a breakup would be good for shareholders -- the Ma Bell split being the pundits' favorite comparison, if only because there are no other comparisons to make. What the remedies could curtail is the amount of power concentrated in the hands of Gates and Ballmer, which is at least some of the reason they're both protesting a breakup so loudly -- not to say protesting too much.
What's it mean for investors? Well, as Morgan Stanley's Mary Meeker commented last week as she lowered her estimates for the software behemoth, "The easy money days are behind us." So don't count on the Gates family fortune doubling annually anymore. More likely is that Microsoft will start behaving like the Dow stock that it is -- paying respectable dividends from its $20 billion-plus cash pile and increasing sales a respectable 10 to 20 percent a year. If it is broken up, the applications software business (Office, Web server stuff and so on), which unlike Windows is still bulking up over 30 percent a year, could continue to climb like a growth company. Either way, Microsoft shares in the $60 range are pretty attractive in the long-term -- if you can take the not knowing.
And if the stock doesn't rebound in time to satisfy you, just remember: I wasn't wrong. I was early.