Thursday, April 24, 2008

Psychology of the Microsoft Corporation (MSFT) Q3 2008 Call

Most recent notable analyst changes
March 6th, Cross Research initiated coverage with a Hold.
March 5th, Jeffries & Co initiated coverage with a BUY.
March 4th AmTech Research initiated coverage with a BUY.
Jan 31st, Stanford Research initiated with a BUY.
Jan 22nd, DA Davidson upgraded from NEUTRAL to BUY.

Psychology of the Call (POTC) sees many analysts jumping on the Microsoft (MSFT) bandwagon of late and initiating coverage with BUY ratings. We have our doubts. Here are some quick insights we offered on MSFT in the "Psychology in the Upcoming Week's Data" piece posted Saturday night:

Microsoft's Steve Balmer is politicking of late and we don’t see him backing out, especially in light of GOOG's monster move last Friday.
Obviously, there are many opposing views on the deal judging by the incredible media coverage. We believe YHOO will continue to under perform GOOG and eventually go the way many well meaning companies went, that being extinct. The Google juggernaut might be challenged only by a collaboration between MSFT & YHOO, although our readers should realize that MSFT believes that GOOG is so far ahead their offer for Yahoo shows more desperation than promise.

11th and 12th minute (m) piracy of software addressed by Colleen Healy, General Manager of Investor Relations.
21st m guidance for fourth quarter provided from Chris Liddell CFO.
25th m fiscal 2009 guidance provided.
28th m Yahoo proposal addressed.
30th m Yahoo’s latest quarterly earnings were mentioned with a negative twist, definitely tried to under score Yahoo's value, but also made MSFT look enviable of Google, who they NEVER mentioned by name

The Question and Answer (Q/A) started at 32m

32m Charlie from Sanford Bernstein Q on fiscal 2009, U.S. economy getting weaker A: MSFT's diversification is good, but we've built in the potential economic slow down in the conservative guidance.
34 m Sarah from Goldman Sachs Q on why 2009 guidance is so robust, because of Yahoo? A: POTC feels management refused to answer the question. Sarah knows what most feel, that MSFT is guiding 2009 counting on having Yahoo in hand, perhaps a tradable development/tell given?
36 m Heather from UBS Q Piracy, looks like quarter over quarter (q/q) comparables (comps) getting tough for second half of 2008, and stock buy back? A: Piracy is very difficult to address on a q/q, it's something we look at on a year over year (y/y) basis more.
37 m Piracy and comps getting tougher, China mentioned as a problem.
39 m Stock buy back was low in the quarter because of potential Yahoo transaction; another tell/clue for our readers here...
39 m Kash from Merrill Lynch Q on guidance, word "philosophically" used twice, wondering about bottom line if Yahoo transaction were to not happen A: Again, POTC saw the answer as vague, completely "stuck on stupid, or yahoo"; (all analysts questions so far are questioning the future guidance, and whether it is too high based on the assumption that Yahoo is in hand).
43 m John from Bear Stearns Q On piracy, more color wanted "get a foot, give up a yard" phrase mentioned; A: You are right about piracy, but it could change from q/q.
45 m China mentioned as a negative in terms of piracy.
47m Follow up Q from John, how can you see OC sales increase given the macro environment. A: Dodged question, and as John attempted to ask another question, he was cut off, POOF ~ PLEASE LISTEN TO THIS… POTC recalls a similar event on Google's CC, but Eric Schmidt apologized and the analyst asked what he wanted at a later point in the call.
48 m Rob from RBC Q on Aquantive: A: Extremely happy, underlying business with 96 new various publishers.
50m Profitability another issue.
Here's a quick peek at the $6B cash buy out of Aquantive last year:
50 m Kirk from Banc of America Q Dynamics of operating margins A: Difficult in judging by one quarter, (but pointed out by reading some trends are positive). POTC again felt MSFT did not want to admit weakness as they position themselves for Yahoo.
52m follow up on PC inventory levels; A: Nothing we're seeing is unusual.
53m Brad from Citigroup Q on Vista and XP upgrade cycle/pricing; A: In the 3rd quarter no Vista related problems, channel shift to larger OEM's not a Vista issue, nothing in 3rd quarter specific to Vista

Call ended in at 56 m

MSFT's management was forced to be highly political because of the pending Yahoo proposal.
CEO Steve Ballmer was a no show. Our team feels MSFT has reached such a tremendous scale and market capitalization, they would be wiser to split the company up than to buy Yahoo and later be Googled. We don't see Yahoo going for less than $35/share, so even though we don't like Yahoo based on operating metrics, we don't see Ballmer backing off; so psychology here is KEY. Valuation reflects sentiment and our readers would be wise to buy Yahoo in the $27 range, as we feel it'll go for north of $35 ~

$47B here (Yahoo estimate buy out) and $6B there (Aquantive) for MSFT shows one thing, Bill Gates’ claim to fame is a world changing operating platform that has in effect now saturated the market. We feel MSFT's Steve Ballmer is looking through old "Windows" at Yahoo while dreaming of future advertising revenues from search queries. We don't envision MSFT ever catching up to Google, ever. But what we have taken away from this call looks like easy money for our readers: BUY Yahoo! and make 30% on your money within months. Please, always follow the 11 Commandments when investing/trading. Thanks for reading the Psychology of this Call, now the "Ball-mer" is in your hands; a lay up in the offing!


Anonymous said...

IF that were to happen, the $35 call options May and June would make a fortune.

Anonymous said...

Those calls are both at pennies today, why not.

Anonymous said...

I bought 10 contracts for May 30.00 @ .4 - lets see what happens over the weekend. Ballmer said he wont raise the bid, but has given Saturday as the deadline.