2HRS2GO: No point in defying Microsoft trend

Now is not the time to be a contrarian on Microsoft (Nasdaq: MSFT).

One of the reasons this column exists is to give an alternative to whatever Wall Street's conventional wisdom claims at the moment. Fighting the tape might hurt your investment results, but from a writer's point of view, there's no point in reaffirming what everyone already believes. Makes boring material.

But I can't go against the grain on Microsoft. Not today.

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"If you look at relative growth rates, it's just hard to grow a number that big..." -- Microsoft CFO John Connors.

Last week was supposed to be the week IBM (NYSE: IBM), Intel (Nasdaq: INTC) and Microsoft would release earnings that cheer everyone and turn around the ailing tech sector. Instead, the trio let us down.

All three companies met or beat EPS expectations, but with concerns in the future. IBM's top line recovery from Y2K is taking longer than expected. Intel (Nasdaq: INTC) won't be able to meet demand for awhile. Then Microsoft ended the week with the most depressing picture of all.

MSFT shares crumbled this morning because the most successful mostly-software company in history is slowing. Microsoft sees revenue growth percentages going from the 20s to the teens, and as any novice investor can tell you, tech companies' high valuations are based on expectations of future growth.

It's not just Microsoft being its usual cautious self. The old Microsoft usually tempered near-term expectations, but always remained rosy about the long-term. Now Connors has talked down all of fiscal ༽ by least a few pennies per share on the bottom line.

Going into today, Microsoft traded at 41 times its First Call consensus EPS forecast $1.93 in fiscal 2001. Connors urged analysts to reduce that to $1.88. At its stock price of 66 as of early this afternoon, Microsoft was valued at roughly 35 times that $1.88 figure.

That's not an overreaction, because this isn't the Microsoft we used to know and love and write optimistic things about. This has turned into IBM, chained to the law of large numbers.

Fifteen percent top line growth per year simply doesn't fit the profile of a rapidly growing technology company. Even if Connors was being overly cautious, growth in the high teens isn't that exciting for a software company.

This isn't the Microsoft we used to know and love and write optimistic things about. This has turned into IBM, chained to the law of large numbers. And that means a valuation closer to IBM's 21 times estimated 2001 earnings, rather than the 88 multiple carried by the Microsoft's closest software peer in terms of size, Oracle (Nasdaq: ORCL).

"If you look at relative growth rates, it's just hard to grow a number that big..."

Microsoft probably will finish fiscal 2000 with full year revenue somewhere between $20 billion and $25 billion. I wonder if the $20 billion to $30 billion range doesn't represent some kind of threshold, the spot where business gets more complex than even the best companies' current management structures are equipped for.

Dell (Nasdaq: DELL) saw its torrid growth slow somewhere between the $18 billion and $25 billion mark. Intel was technology's undisputed king of manufacturing until last year, when it suddenly had problems spitting out enough Coppermine chips to keep everyone happy. Along the way Intel passed the $29 billion mark in annual revenue.

Come to think of it, that may have been the problem that sparked the whole thing. Lack of high end chips leading to lower PC demand leading to lower revenue for anyone selling into that market.

Unfortunately for Microsoft, that's just the beginning. Listening to the company, you get the feeling that desktop PC growth, although still robust, is starting to flatten out. It makes a certain amount of sense: after 20 years, almost everyone in the world who wants a PC probably has one; everyone else might be waiting for the less cumbersome devices. At least that's the theory behind the whole Web appliance movement.

"If you look at relative growth rates, it's just hard to grow a number that big..."

Don't get carried away, because Microsoft remains a strong, well-run company that will be around for a long time. But a couple of months ago, I asked if Microsoft had ever let investors down. Now it has. 22GO>