Shares were off more than 11 percent, closing regular trading down $6.38 to $49.13, even though many analysts said Microsoft's warning wasn't a surprise in the wake of warnings from PC sellers and Intel.
Analysts maintained their ratings and lowered estimates across the board. All cited a belief that the company's server software is still doing well and saw hope in the enterprise side of business.
How can Microsoft rebound?
Chris LeTocq, analyst, Gartner
Analyst Christopher C. Shilakes at Merrill Lynch held his "accumulate" rating, along with a "long-term buy," but reduced his target price to $61. He also changed a risk rating to "above-average risk" from "low risk."
Revenue estimates for the second quarter, which ends Dec. 31, were dropped to $6.5 billion from $6.8 billion and earnings estimates to 46 cents a share from 49 cents a share. For fiscal 2001, Shilakes dropped revenues to $25.3 billion to $26.6 billion and earnings to $1.82 a share from $1.90 a share.
He said the shortfall was "widely anticipated" and that he doesn't expect a sharp sell-off.
Microsoft's vulnerability to the PC market suggests that its continued success depends on its ability to "transition from a desktop software company to an enterprise solution vendor," Shilakes said. He added that he remains "cautiously optimistic" as the company slowly transitions from a reliance on desktop software and continues to release higher-growth server-side software.
"We believe it is important for investors to note that Microsoft cited weakness primarily in desktops, and that its server and enterprise business is healthy," Shilakes added.
Christopher W. Mortenson at Deutsche Banc Alex Brown maintained his "buy" rating and also lowered estimates for the rest of the fiscal year, in line with Microsoft's guidance.
"While we are disappointed with this news, it was perhaps somewhat inevitable given that virtually everyone else in the PC food chain had already preannounced," Mortensen said in a research note.
Mortensen said that, though details are still limited, the main shortfall appears to be in desktop applications, followed by the consumer Internet business.
"We continue to believe that the Windows 2000 upgrade cycle will be solid and gain increasing momentum in calendar '01 especially as it relates to server platforms and applications," Mortensen noted.
Chase Hambrecht & Quist analyst Chris Galvin, who had already revised estimates downward last week after warnings from PC makers and Intel, also maintained a "buy" while lowering estimates again.
He noted that "Microsoft was able to adjust operating expenses to cushion the impact to the bottom line" and "gave minimal guidance on which business lines will be most affected, but deferred commentary to the company's regularly scheduled conference call on January 18th."
Lehman Brothers analyst Michael Stanek likewise reiterated a "buy" and lowered estimates for a second time this month.
"Overall we believe that MSFT's strategic and competitive positioning remains compelling, though we believe the stock may trade near its historical valuation lows of 25" times, or $45.25, Stanek said in a research note.
"Microsoft is still an extremely well positioned company, though we expect that investors will sit on the sidelines," Stanek said.