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More Time
Needed to Develop Windows 98
The stock closed down 7 1/4 points at 130 11/16 on nearly 2 1/2 times its 30-day average volume of 6.6 million shares. The stock's downward spiral began at 1 p.m. after a Goldman, Sachs analyst announced that Gates and company would not be able to deliver their Windows 98 product in first quarter 1998 as previously announced, and would instead ship the product in mid-second quarter. Within one hour of the announcement, the stock dropped 5 points. The stock had already been experiencing some turmoil in early-morning trading on the heels of a Barron's article that asserted that Microsoft's stock was overvalued and the company would have harder time dominating the industry in the future. But the stock had started to recover shortly before the Goldman, Sachs announcement. Rippling the Battleship But while Wall Street reacted strongly, many analysts who follow the world according to Gates don't give much credence to either the Barron's piece or the delay in Windows 98 and don't expect any long-term effects on the stock. Most downplay the stock's fall, too. "I think it's a clear over-reaction. Win98 is not a significant release," says Esther Schreiber, equity analyst for Credit Suisse First Boston, who adds that these delays are very typical for the software giant and should be expected. "The Microsoft story is not about Windows 98 or Windows 95, it's about Windows NT. The most important news will be Tuesday when Microsoft announces its Enterprise edition, and its price and availability. That's what's going to add real revenue to the firm. Schreiber, who expects the Enterprise version of NT to be priced at about $1,000 more than the standard NT version, also points out that Microsoft will announce clients' access fees for its NT users. "This will add some significant revenue," she says. "I think you'll see the stock pop right back up when they announce their new pricing plan and people see how it will translate into real revenue." But Other Boats Rocked Microsoft's slide helped drag just about every other tech share—and the tech-heavy Nasdaq—lower. The Nasdaq finished the day down 14.40 at 1,634.90. Leading the group were chipmaker Intel, which dropped 2 1/8 to 92 1/16 and Compaq, which fell 1 1/8 to 64 5/16. "This doesn't change our earnings outlook or our outlook on Microsoft at all," says Michael Stanek, an analyst with Lehman Brothers, who rates the company a strong "buy." "There is still a 32-bit operating system out there called Windows 95 and a 4.0 version of Windows NT and both continue to sell at record paces. So, I don't care what operating system is out there, as long as there is a 32-bit system in the market place and has Microsoft's name on it," he adds. "The only thing it does is rob some upside surprise from March and pushes it to the June quarter." Further countering Barron's bearish article and the Goldman, Sachs announcement was a bullish report by Salomon Brothers' analyst Neil Herman, who asserted his strong outlook for Microsoft Though Some See Rougher Seas But not everyone is so smitten with Microsoft. Brian Goodstadt, an equity analyst with Standard & Poor's, believes Monday's reaction is consistent with the overvaluation of Microsoft. He sees it as the beginning of a long overdue correction in lowering the stock to a more attractive and realistic valuation. "It's just more of the same thing we've been hearing about for a couple of months," says Goodstadt, who downgraded the stock from a "buy" to a "hold" two months ago. "I've thought it was overvalued for a while. I thought it had gotten a little ahead of itself. For a while there it was trading at two times its 1998 earnings estimate, which is pretty high." While Goodstadt agrees that Win98 is not as big a deal as Windows NT or Win95, he does see it as a setback. "They've had these setbacks in the past. Windows 95 came out very late," he says. "But at a time when people are questioning the valuation of the company, this is just more bad news. While I think positively of the company, it's not worth buying until it comes to a more realistic valuation." What Really Matters? Still, Lehman Brother's analyst Stanek takes issue with investors who bought or sold Microsoft stock on news of the Win98 delay. "If you are buying or selling on this news, your in it for the wrong reasons. You should be buying it for its ability to deliver consistent earnings, usually one or two cents above expectations. This is no longer a company that moves from one shipment of a new product to the next. They've grown beyond that. If you are in it for the product cycles, you're going to get whipped," he says. "This is not a company that is going to grow at 50 or 30 percent, but it is one that will grow 15 percent to 20 percent on the top line and 20 percent to 25 percent on the bottom line, consistently, quarter in and quarter out, year in and year out," Stanek adds. "And some day that consistency will help to make it the first trillion-dollar market cap out there." 
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