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Who Needs Facebook? MSFT Thriving on Its Own

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[qi:053] This will be good news or bad news depending on how you feel about Microsoft, but the software company seems to be roaring back. And it has nothing to do with its overpriced, over-hyped 1.6 percent stake in Facebook.

Instead, it has more to do with the earnings report it delivered Thursday afternoon for its fiscal first quarter that ended Sept. 30. Beating the Street by six cents a share (its biggest earnings surprise in a few years), while showing $1.2 billion more in revenue than analysts had expected and a significant improvement in its operating margins (to 43 percent from 41 percent a year ago).

Not only was that good, it was way better than Wall Street seems to have been expecting. The stock was up at $35.50, as of this writing, in after-hours trading — surging 11 percent in less than an hour after Microsoft (MSFT) reported earnings. Here’s why I think that performance is so impressive.

First, it launches the stock back to a level it hasn’t seen since July of 2001 — more than six years ago. Microsoft reached as high as $31.84 on July 19 of this year. But the last time the stock closed officially above $35 was back when the tech bubble was still deflating. If Microsoft closes above $35 Friday, it will mark a six-year odyssey back to that level.

But that doesn’t mean Microsoft will necessarily be overpriced again. Its net profit for the last 12 months total $14.9 billion, or three times its net income six years ago. In other words, Microsoft’s stock may soon be back at its 2001 level, but its profits have tripled in the meantime. Its after-market market value of $333 billion is only 22 times that profit.

Second, Microsoft had a $300 billion market cap at the end of Thursday, before its earnings report, about 150 percent of Google’s (GOOG) and roughly double that of Apple’s (AAPL) on the same day. That’s a lot of market cap, and to get it to rise 11 percent means pumping in increasing it by $33 billion dollars.

As the chart from Google Finance shows, Microsoft’s stock rose to $35.81 from $32.04 in 45 minutes. In that frenetic three-quarters of an hour, when tens of millions of shares were traded, the value of the stock was rising an average of $12 million a second.

So this is a bigger vote of confidence for Microsoft from Wall Street than the headline figures may indicate. Everyone was expecting a pretty strong quarter from Halo 3 and Xbox 360 sales, but the actual numbers were even stronger. Improbably, 85 million copies of Vista have been sold.

(One weak spot remains online advertising, which thanks in part to investments in aQuantive and other properties, posted a loss of $264 million.)

This quarter may mark a turning point when investors stopped looking at Microsoft as an aging, arthritic giant that could at best hope for maintaining slow and steady profits with the occasional if beefy dividend thrown in. After all, EPS grew 29 percent, to 45 cents a share.

That profit growth rate may be a league below Apple and Google. And Microsoft is still far from being an innovation powerhouse like either of those companies. But it marks a significant improvement from the Microsoft of a few years back, when it would have sounded odd to say what we know today: Microsoft is alive and well, and still in the race.

18 Responses to “Who Needs Facebook? MSFT Thriving on Its Own”

  1. MSFT apps made our lives segmented with the 10 apps we have to deal with everyday.

    Facebook apps made it scattered with a 1000 little tiny apps to deal with everyday.

    Yet, hope is on the way.

    MSFT investment – though it gives Facebook high valuation, is indirectly a low price. With the contractual constraints on Facebook, MSFT needs to and will make a lot more money off of this deal.

    The puffed up value will hence stabilize, and MSFT will get more than its value back.

  2. Mark Wells

    Great investment. Microsoft should ise it’s huge cash cache to just buy up other companies. They need to get into video, so Dailymotion or Cavenger would be great acquisitions, too.

  3. Well, since MSFT changed accounting on revenues from OS licenses – from over their lifetime to time of sale – yeah of course they got a huge bump in earnings. Won’t be easy to hide that next quarter/year.

    Oh, and they hid that $1B loss on Xbox recalls back in last quarter’s earnings because if they didn’t Xbox division would still be losing money. Now THAT’S a slick trick. But again, it won’t be easy to hide next quarter/year.

    So, yeah, they need Facebook because they’re hoping for revenues in the coming quarters/years to hide their sins of this quarter.

  4. Microsoft is just getting started. Service Pack 1 has not been shipped yet, and most business’ won’t be buying until it does (early 2008). Then sales will really take off.

  5. Kevin Kelleher

    @john fitzgerald: microsoft’s revenue grew 27% and only 25% factoring out forex. but analysts were expecting 16% growth. it’s still a big surprise. om mentioned earlier the effect the weak dollar is having on tech earnings, and it’s good to keep in mind. but it’s also important to not overstate its impact.

  6. Microsoft continues to attract the best talent in the world and despite the hoopla know how to produce software pretty well.

    Not sure who thinks it is a stodgy company appealing to folks seeking dividends!

  7. John Fitzgerald

    Why is everyone excited here? The US$ hit an all-time low, thus taking the exchange rate for euros etc. in a positive direction for US public companies. This is NOT a case of Microsoft performing better. Its a case of Microsoft benefiting from a currency weakness.

  8. Kevin Kelleher

    “Pumping” may not have been the best word to use, but investors did add $33b to the stock’s value. 50 shares at $40 would be knocked back down in a second. But with MSFT this afternoon, there were tens of millions of shares traded at that value, suggesting a rather broad and – for now at least – sustained consensus for this big jump.

  9. “That’s a lot of market cap, and to get it to rise 11% means pumping in $33 billion dollars.”

    Really? I don’t think the market actually put in $33B into MSFT stock – or needs to for the stock price to rise 11%. If you bought 50 MSFT shares at $40 on the last trade of the day, you just set the market price for the stock. There’s no need to pump in $Bs.