COMMENTARY--Argue about Merrill Lynch's best-known analyst if you want, but you can't doubt his market heft.
Henry Blodget's downgrade of Microsoft (Nasdaq: MSFT) knocked almost 2 percent off the company's stock price this morning. He's not the first person to doubt Microsoft's long-term potential: five research houses, including two institutional firms and one national broker, had "hold" ratings on MSFT going into today, according to Zack's Investment Research. Another seven brokerages had the equivalent of luke-warm "moderate buy" advisories on the stock.
But Blodget is a Big Wall Street Name, so people listen. He made his reputation as a CIBC Oppenheimer analyst a couple of years ago, when he issued a self-fulfilling price target of $400 per share for Amazon.com (Nasdaq: AMZN).
Amazon.com didn't sustain that level, but it held up long enough for Blodget to ride a wave to Merrill Lynch, where he continues to follow Internet companies such as AOL Time Warner (NYSE: AOL), Yahoo (Nasdaq: YHOO) and Amazon.com (Nasdaq: AMZN).
Microsoft's Internet focus puts it in that group, Blodget says.
"Microsoft is sort of an unusual company in that it doesn't really fit into any group in particular, and as we look forward, we really see their future more and more on the Internet side," Blodget told CNBC this morning. "They really are the PC industry on the software side, and a lot of those products are really becoming Internet-enabled, so it seemed to fit in our universe as well as any other."
Microsoft trails AOL Time Warner from a consumer standpoint, Blodget points out.
"If they (Microsoft) captured AOL's market position completely, their growth rate would be in great shape," Blodget said. "But they're not as powerful as AOL, so when we look at it, we see slow growth in their main business, and good-growth-but-not-good-enough-growth (in their other businesses) to offset the slowdown."
Blodget took over Microsoft from Christopher Shilakes, who follows companies such as Oracle (Nasdaq: ORCL), Siebel Systems (Nasdaq: SEBL), Ariba (Nasdaq: ARBA), BMC Software (Nasdaq: BMCS) and i2 Technologies (Nasdaq: ITWO), among others.
Those companies sell software that will never be used by Joe and Jane Consumer. On the other hand, most of Microsoft's output is used by millions of folks who will never directly use an Oracle suite.
Again, Merrill Lynch isn't the originator of that argument. Mary Meeker, who also became a celebrity analyst following Amazon.com and its ilk, covers Microsoft for Morgan Stanley Dean Witter. Thomas Weisel Partners' well-known director of Internet research, David Readerman, tracks Microsoft and Yahoo.
You don't have to be original to be influential. But being influential lands you Microsoft coverage.
Blodget's readers will feel right at home with today's Merrill Lynch note, which includes a healthy dose of his habit of covering his bases. Less charitable observers would remove the 'b' and 'e' from the last word in the previous sentence.
No matter how you characterize it, Blodget takes pains to make sure that no matter what happens to the stock over the next few months, he can say he was right:
"Near-term, in a rough market, we believe the stock might continue to perform well, given the co's extraordinary cash flow and financial strength. ... Over the long-term, however, we don't find MSFT's potential upside particularly compelling at this price." (Emphasis on "might" is mine. --S.N.)
Now Microsoft investors can enjoy these shades that Amazon.com and AOL shareholders have relished for the last couple of years.
It's sort of a consumer company and sort of an enterprise company. The stock could do well, but if it doesn't, you were warned. In Blodget's world, there are no definite answers. Everything is tinged with gray. 22GO>