Microsoft shares climb on Windows 2000 optimism

Despite the uncertainty hanging over the company as a result of the pending Justice Department antitrust suit, a group of analysts issued reports today raising their price targets for the company's shares. The reason: Windows 2000's potential to dominate the nascent e-commerce and Internet battlegrounds much as Windows 95 dominated the personal computer desktop.

"Microsoft stock has significantly underperformed both the red-hot e-commerce sector as well as the large-cap tech gorilla sector," Andrew Roskill said in a report from Warburg Dillon Read. "With anticipated strong financial results and significant upgrade cycle ahead, we think it's catch-up time for the stock."

Roskill raised his target price from 110 to 130.

Microsoft closed at 113.69, up 5.25. Earlier in the day, the shares reached 115, an all-time high.

Released to CD-ROM and PC manufacturers yesterday, Windows 2000 is Microsoft's next generation corporate operating system. It is set for an official release on Feb. 17 after more than three years of delays. The most ambitious software development project in Microsoft's history, Windows 2000 is the first Windows operating system that is secure, reliable and manageable enough to run heavily trafficked Web sites, according to Microsoft.

In light of the Windows 2000 release, analysts from Donaldson Lufkin & Jenrette and Lehman Brothers also issued target prices for Microsoft between 115 and 140 per share, sharing the view that the stock has been largely undervalued by investors.

"In the new e-commerce era, it's all about centralized big server computing, and in that regard Windows 2000 is not only an important platform release but will likely drive further server application sales," such as Microsoft's SQL Server and Exchange, according to Roskill.

In addition to the release of Windows 2000 in February, next year Microsoft also is slated to ship its next consumer operating system, code-named Millennium, as the final chapter in its Windows 98 trilogy of operating systems. Along with Office 2000 and its database software products, the company is well-situated for long-term profitability, according to the reports.

"Yesterday, Microsoft announced an on-time release to manufacturing of Windows 2000," Lehman Brothers' Michael Stanek said in his report. "While the product has little to no impact on the numbers for both Q2 2000 or Q3 2000, the shipment of the new operating system opens the door for a multiyear product upgrade cycle."

Stanek has a target price of 130 for Microsoft.

With the cloud of the antitrust trial hanging over the company, Microsoft's shares have remained between 75 and 95 for most of the past year. Meanwhile, investors have doubled or tripled their investments in countless other tech stocks. Companies involved in the networking, Linux, wireless and business-to-business sectors have been particularly hot.

Compared to competitors such as Oracle, which is currently trading at about 88 per share, or 75 times its anticipated 2000 earnings, Microsoft is significantly undervalued, noted both Roskill and Lehman Brothers' Stanek. Microsoft shares, which are trading at about 50 times anticipated earnings, look "like a steal," Stanek said in his report.

With the recent spurt in the stock price, Microsoft's market capitalization has reached nearly $600 billion, putting it back in first place ahead of General Electric's $475 billion market cap.

Bill Gates, the company's chairman, has profited the most from the run-up. His shares are now valued at about $115 billion, including the $3.7 billion he gained today. Just a few weeks ago Gates' stake was worth a paltry $85 billion, give or take a couple billion.