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Analyst downgrades Microsoft on PC worries

A Prudential analyst downgrades his estimates on Microsoft, citing more ominous news about PC sales.

Prudential Securities analyst Douglas J. Crook downgraded Microsoft Wednesday, warning that slowing PC sales could affect the company's desktop software sales.

Crook urged investors to "hold" rather than "accumulate" Microsoft stock and cut earnings estimates by one penny to 48 cents per share for the quarter ending Dec. 31. He also lowered 2001 estimates to $1.89 from $1.91 and 2002 estimates to $2.05 from $2.10.

"The net of our concern is that the desktop segment, which contributed $16 billion in revenues for 71 percent of the mix, may actually slow further than the 12 percent growth recorded in (fiscal 2000) if PC demand unexpectedly wanes," Crook wrote in a report.

While it has been generally acknowledged that PC sales are slowing, Crook wrote that a recent Prudential visit to Taiwan, South Korea and Japan also showed a slowing of notebook computers.

"If notebook demand has weakened, we believe the change in demand would impact Microsoft, which does 85 percent to 90 percent of its business in the business market," Crook wrote. "We also note that Microsoft has been counting on a resurgence of business PC growth for several quarters, and if notebook demand is deteriorating, we believe the hoped-for business PC resurgence may be further off than expected."

Crook wrote that he was also concerned with the possibility that chipmaker Intel may freeze, or even reduce, its capital expenditures next year. Last week Intel lowered its fourth-quarter revenue estimates partly as a result of large order cancellations.

"New news we have learned is that Intel has apparently placed a hold on all equipment orders and may reduce capital expenditures next year, thus suggesting overall PC demand may be highly uncertain looking forward," Crook wrote.

In recent weeks, several PC manufacturers and chipmakers have warned of lower-than-expected revenue and earnings because of the PC slowdown. Warnings from Intel, Advanced Micro Devices, Gateway, Apple Computer and Compaq Computer have surfaced with industry reports about consumer disinterest in PCs this holiday season.

Last week, Goldman Sachs analyst Rick G. Sherlund cut his earnings and revenue targets for the company, sending the stock down 6 percent. In his research note, the influential analyst cited sluggish PC sales.

Microsoft shares closed regular trading down $1.13, less than 2 percent, to $57.25. The company's shares benefited from optimism that Republican candidate George W. Bush has finally won the presidential election. Bush is thought less likely to pursue the antitrust case against Microsoft.