By Franklin Paul
NEW YORK, July 24 (Reuters) - Microsoft Corp shares plunged 8 percent on Friday, as its weaker-than-expected results contradicted Wall Street's belief that the worst is over for the technology sector.
The drop shaved about $19 billion off Microsoft's market value and it was the world No. 1 software maker's biggest single-day fall since January 2009, when its quarterly results had also missed expectations.
Some analysts said they were concerned that Microsoft showed weakness across all its business units, and questioned whether the company's much-anticipated launch of a new Windows operating system could reignite growth later this year.
'While there are market indications that PCs and servers are beginning to stabilize, we do not anticipate a snapback in demand, despite the Windows 7 October launch, until 2010,' said Barclays Capital analyst Israel Hernandez.
'In addition to cyclical exposures, we also believe that Microsoft faces longer-term challenges such as geographic mix issues, pricing pressures on Windows from netbooks, and heightened competitive pressures which are likely to continue to weigh on margins,' he wrote in a note to clients.
Despite the sharp share drop, some investors were still optimistic about the longer term prospects of the Redmond, Washington-based company, whose operating systems power the vast majority of personal computers.
'As the economy stabilizes, there will be more money spent on IT and Microsoft will be a beneficiary,' said Andy Rutlin, a Microsoft analyst for Thornburg Investment Management, which has built up its position in Microsoft in the past six months.
'The reason we own Microsoft is for the Windows 7 product upgrade cycle,' said Rutlin, adding that Microsoft was hit by some people shying away from purchasing new PCs until the new operating system is released.
Rutlin doesn't plan on buying any more Microsoft because the stock is already among the top holdings in the Thornburg Core Growth Fund, but he suggested others 'take an opportunity like today to increase positions in the shares.'
WINDOWS ANNUAL SALES FALL
In its fiscal fourth quarter ended in June, Microsoft's revenue fell 17 percent to $13.1 billion, some $1 billion smaller than analysts' average estimate. It was also the first-ever decline in annual sales of Windows.
The stock, which had risen 70 percent in the past four months, fell as much as 10.76 percent on Friday before closing at $23.45, down 8.26 percent, on Nasdaq. It was the biggest drag on the Dow Jones industrial average and Nasdaq composite index, which halted a 12-day rally and ended down 0.39 percent.
Microsoft trades at under 14 times forecast fiscal 2010 earnings, according to Reuters Estimates. In comparison, Oracle Corp trades at a multiple of 15 and IBM at 11.
Kim Caughey, senior analyst at Fort Pitt Capital Group, said Microsoft is attractively priced for a business pick-up as companies start replacing PCs after holding off for years.
'Microsoft has a monopoly on the operating system. I don't think there is anything in at least the next three years that can replace that monopoly,' she said.
Jefferies & Co analyst Katherine Egbert said the company had 'dismal revenue' and a 'somber June,' but still raised her price target to $29 from $28 and repeated her 'buy' rating.
'Microsoft reported very weak revenue in all segments for June and an overall shift towards cost-conscious purchasing. But consumer PC and server sales flattened year-on-year, offering hope,' she said.
Citigroup analyst Brent Thill said he was also disappointed by Microsoft's weak forecast for gross margins in fiscal 2010.
Still, in a client note titled 'Keep Your Eye On The Prize,' he repeated his 'buy' rating, citing the potential for improvements in 2010 when corporate demand is expected to rebound and Windows 7 may help profit margins.
(Reporting by Franklin Paul; Additional reporting by Jim Finkle and Erin Kutz in Boston; Editing by Tiffany Wu and Richard Chang) (To read more about our Media news, visit out MediaFile blog online at http://blogs.reuters.com/mediafile ) Keywords: MICROSOFT/SHARES (Email: Franklin.Paul@thomsonreuters.com +1 646 223 6195; Reuters Messaging: Franklin.Paul.reuters.com@reuters.net) COPYRIGHT Copyright Thomson Reuters 2009. All rights reserved. The copying, republication or redistribution of Reuters News Content, including by framing or similar means, is expressly prohibited without the prior written consent of Thomson Reuters.
NEW YORK, July 24 (Reuters) - Microsoft Corp shares plunged 8 percent on Friday, as its weaker-than-expected results contradicted Wall Street's belief that the worst is over for the technology sector.
The drop shaved about $19 billion off Microsoft's market value and it was the world No. 1 software maker's biggest single-day fall since January 2009, when its quarterly results had also missed expectations.
Some analysts said they were concerned that Microsoft showed weakness across all its business units, and questioned whether the company's much-anticipated launch of a new Windows operating system could reignite growth later this year.
'While there are market indications that PCs and servers are beginning to stabilize, we do not anticipate a snapback in demand, despite the Windows 7 October launch, until 2010,' said Barclays Capital analyst Israel Hernandez.
'In addition to cyclical exposures, we also believe that Microsoft faces longer-term challenges such as geographic mix issues, pricing pressures on Windows from netbooks, and heightened competitive pressures which are likely to continue to weigh on margins,' he wrote in a note to clients.
Despite the sharp share drop, some investors were still optimistic about the longer term prospects of the Redmond, Washington-based company, whose operating systems power the vast majority of personal computers.
'As the economy stabilizes, there will be more money spent on IT and Microsoft will be a beneficiary,' said Andy Rutlin, a Microsoft analyst for Thornburg Investment Management, which has built up its position in Microsoft in the past six months.
'The reason we own Microsoft is for the Windows 7 product upgrade cycle,' said Rutlin, adding that Microsoft was hit by some people shying away from purchasing new PCs until the new operating system is released.
Rutlin doesn't plan on buying any more Microsoft because the stock is already among the top holdings in the Thornburg Core Growth Fund, but he suggested others 'take an opportunity like today to increase positions in the shares.'
WINDOWS ANNUAL SALES FALL
In its fiscal fourth quarter ended in June, Microsoft's revenue fell 17 percent to $13.1 billion, some $1 billion smaller than analysts' average estimate. It was also the first-ever decline in annual sales of Windows.
The stock, which had risen 70 percent in the past four months, fell as much as 10.76 percent on Friday before closing at $23.45, down 8.26 percent, on Nasdaq. It was the biggest drag on the Dow Jones industrial average and Nasdaq composite index, which halted a 12-day rally and ended down 0.39 percent.
Microsoft trades at under 14 times forecast fiscal 2010 earnings, according to Reuters Estimates. In comparison, Oracle Corp trades at a multiple of 15 and IBM at 11.
Kim Caughey, senior analyst at Fort Pitt Capital Group, said Microsoft is attractively priced for a business pick-up as companies start replacing PCs after holding off for years.
'Microsoft has a monopoly on the operating system. I don't think there is anything in at least the next three years that can replace that monopoly,' she said.
Jefferies & Co analyst Katherine Egbert said the company had 'dismal revenue' and a 'somber June,' but still raised her price target to $29 from $28 and repeated her 'buy' rating.
'Microsoft reported very weak revenue in all segments for June and an overall shift towards cost-conscious purchasing. But consumer PC and server sales flattened year-on-year, offering hope,' she said.
Citigroup analyst Brent Thill said he was also disappointed by Microsoft's weak forecast for gross margins in fiscal 2010.
Still, in a client note titled 'Keep Your Eye On The Prize,' he repeated his 'buy' rating, citing the potential for improvements in 2010 when corporate demand is expected to rebound and Windows 7 may help profit margins.
(Reporting by Franklin Paul; Additional reporting by Jim Finkle and Erin Kutz in Boston; Editing by Tiffany Wu and Richard Chang) (To read more about our Media news, visit out MediaFile blog online at http://blogs.reuters.com/mediafile ) Keywords: MICROSOFT/SHARES (Email: Franklin.Paul@thomsonreuters.com +1 646 223 6195; Reuters Messaging: Franklin.Paul.reuters.com@reuters.net) COPYRIGHT Copyright Thomson Reuters 2009. All rights reserved. The copying, republication or redistribution of Reuters News Content, including by framing or similar means, is expressly prohibited without the prior written consent of Thomson Reuters.