October 04, 2010, 3:06 PM — Microsoft shares flirted with a 52-week low Monday following a downgrading of the company's stock by Goldman Sachs, trading as low as 23.78, 60 cents, or 2.5 percent, below Friday's closing price.
The notes accompanying the Goldman Sachs downgrading of Microsoft (NASDAQ: MSFT) shares to Neutral from Buy were stark in their assessment of the company's financial performance over the past eight years and its poor competitive positioning in an increasingly mobile world. A couple of samples:
"We believe the intrinsic value of shares cannot be unlocked if the status quo remains, and we have increased caution near term on a more elongated PC refresh cycle, combined with the newer threat of notebook cannibalization from tablets, where Windows does not yet have a presence."
And:
"Microsoft's shares have suffered significant multiple compression year-to-date (down 27% compared to the S&P 500 down 1%), despite an 11% rise in calendar 2011 consensus estimates."
It's worse than that. Going back to late 2002, more than a year after tech stocks began collapsing, Microsoft shares are up just 9 percent. Check this stock graph to see how that stacks up against shares of other tech competitors such as Oracle, IBM and Hewlett-Packard. All have outperformed Microsoft.
Goldman Sachs paints a picture of a technology giant past its prime, watching its core business (computer software) obsolesce and not able to keep up with the rapidly changing mobile/digital/open source/cloud world. Indeed, "we believe the intrinsic value of shares cannot be unlocked if the status quo remains" is analyst-ese for "unless big changes are made, and soon, Microsoft is not a good investment."
Microsoft would counter that it's as relevant as ever, and as proof would point to the unveiling of Windows Phone 7 for the holiday season. (T-Mobile on Monday announced it will sell a mobile phone running Windows Phone 7.) But Microsoft's aggressive marketing push for Windows Phone 7 -- not to mention a lawsuit Redmond filed last Friday against Motorola over certain phones using the Android mobile OS -- more than anything underscores how far ahead RIM, Apple and Google already are in the smartphone OS market.
Add in the fact that Microsoft has not made a single acquisition this year, and it's easy to see why investors might think Redmond doesn't have a viable game plan.
Goldman Sachs has some suggestions for Microsoft, including: increasing its dividend, a "coherent consumer strategy" (dump some product lines), and a bigger commitment to cloud computing.
Microsoft did recently announce its first quarterly dividend in two years as part of an effort to reward shareholder patience and attract more buzz on the street. But Goldman Sach's move makes clear it's going to take a lot more than that to regain Wall Street's confidence.
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