Why do stock analysts have so much power?(updated)

July 25, 2010 | By rush24

Well, it is Sunday and that means a slow news day, but in a way, it gives me the chance to rant on a topic that is indirectly related to WP7. Microsoft just posted record fourth quarter revenues of $16.04 billion and net profit of $4.52 billion beating Apple’s numbers by over a billion, but in spite of all that, their stock price fell while Apple’s rose! In fact, they have had a solid earnings report for the last five years but for some reason, their stock price seems to be stuck in the mid $20 dollar range.

Former Microsoft evangelist, Don Dodge, who now works for Google, has his take on this post. He states that Wall Street views MS as a stable Blue Chip stock, and not a high growth stock like Apple, which usually command higher share prices. He goes on further to say

Maybe Microsoft should accept Wall Street’s conclusion that it is really a Blue Chip stock and stop acting like it is a growth stock. Maybe they should listen to Mini-Microsoft and cut expenses significantly, focus their product development efforts, and increase their dividend.

The dig on Microsoft’s spending on the Kin phone, Bing and other acquisitions is also puzzling because even with the so called “failures”, MS still made more money and beat Street estimates. Furthermore, Bing will feature prominently on the new Windows phone and so will the lessons and some features from the Kin phone. While I may not fully understand the inner workings of the stock market, I think that the analysts have severely undervalued MS for years and have chosen sides with the new tech darlings; Apple and Google. Don’t get me wrong, these two companies make good products, but there is no way they should be valued at ten times more than MS. Windows phone 7 and Kinect will also feature new innovations that are not present on the current “hot” platforms.

The folks over a valuecruncher.com somewhat share my sentiments. They note

Here is the comment I left on Don’s post:

I agree that the market is valuing $MSFT more like HP ($HPQ) or IBM ($IBM) than Apple ($AAPL) or Google ($GOOG) – on an EV/EBITDA basis.
http://www.valuecruncher.com/companies/765 This is despite $MSFT having financial performance characteristics more like $AAPL and $GOOG than $HPQ or $IBM – EBITDA margins as only one metric.$MSFT has a great core business that will endure for a while yet. The market is placing a pretty low value on that business – and nothing on any growth options that the company has.

I have never understood how a bunch of people can come up with hypotheticals, crunch numbers for estimated returns, and then base the stock price on these “estimates” instead of “real” values! I am amazed that a company can generate record profits, posses innovative products in the pipeline, will still not get the respect it deserves because they are not just as “cool” as the other guys. Can somebody please set me straight if I’m wrong?

Update: Bob Caswell provides a longer detailed argument in the links below (via techmeme)

Defining success of (Tech) companies

Microsoft: Great place to work

About Rush24

Rush24 loves everything Microsoft and is fascinated by the influence of technology in everyday life.

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http://www.facebook.com/Bugblatter Bug Blatter

Capitalism doesn't work.

Unfortunately capitalists have managed to somehow tie capitalism together with democracy, so if you're against capitalism you're against democracy.

Not that democracy works either…

And the net result is that companies are valued based on perception rather than intrinsic worth.

Not to mention that companies work purely in their own interests with no social responsibility, , except when it's good PR, and only worry about their employees' well-being insofar as it might affect their profitability.

Other than that, capitalism rocks!
Michael

It wrong to just look at stock price. If you want to compare market values, then compare "Market Capitalization", as that is stock price multiplied by number of stocks. So, what you will realise is that there is more than 10 billion microsoft stocks, less than 1 billion apple stocks and slightly more than 300 million google stocks.
Like you said, stocks aren't valued on "what is", but expectations of the future. If you're gonna invest in something, you're gonna expect your money back at some point. Because you're not likely to get your money back the split-second you invest them, but in the future, it makes sense to base the value of your investment on what you expect the future to be?
Anyway, late and tired. If my post makes litte sense blaim sleepiness.

Regards
rackandpinion

Microsoft is a low risk stock. The windows and office business is not going anywhere for a long time to come. Apple on the other hand is way overvalued. Sure they have a very popular product right now, but what will happen when all these manufacturers start saturating the market with devices that look and do the exact same thing? You are already seeing android growing at a fast pace, and no doubt windows phone 7 with also be a big success. You also have to understand that people buying iphones are not Apple fanboys. They are just buying whats hot right now. They have no brand loyalty. When the next hottest thing is out, everyone will dump the iphone. Then what will happen? Apple will crash and disappear into obscurity. It is very risky to invest into that business.
http://www.frazell.net Frazell Thomas

The stock market rewards growth! Investors aren't paying for profits today they are paying for a piece of tomorrow's profits.

There isn't much I can see from Microsoft that will drive growth. Their core businesses are under too much attack and WP7 isn't shipping yet and hasn't proved it will do anything for MS (yet).

So, the market is right in its current valuation of Microsoft. The company can generate a stable return from its cash cows, but they have yet to find their footing in the new markets they need to be a growth stock.

http://intensedebate.com/people/rush24 rush24

What more growth do you need when the company is making record profits year after year that even surpasses the so called growth stocks? Isn't this the same kind of stuff that caused the tech bubble in the 90's, where start ups, living off investment capital and convoluted business plans, garnered ridiculously over-inflated stock values because they were the "future" only to later come down to a crushing halt when business 101 reality hit in that, you can not sustain a company on hope. You either make money or you go out of business.

Frazell Thomas

I don't know what info you are looking at, but Apple has solid profits to back its growth to date…
http://www.wolframalpha.com/input/?i=aapl+msft

Apple is nearly as profitable as Microsoft in raw dollars and doesn't have cash cows as lucrative as Microsoft. It is amazing when you really look at what Apple has pulled off. They are almost as profitable as MS in raw dollars and they were pushed that far with an MP3 Player and Cell Phone. And you fail to see the growth MS missed??

Don't even begin to look at the profit from a shareholder's perspective (earnings per share) as they really put MS to shame…

Rain

They say market always run on emotion, and that might exactly happening to Apple and Google for the moment in their life cycle. MS on the other hand is in their mature cycle and that's why it's market value has already gone through shake out. Beside, MSFT payout dividends, Apple stock doesn't. So the the investor are making money in apple stock by overvaluing it for those tiny day traders to buy in. Stock value doesn't mean jack in market share.
arasheps

Just stop bill gates from selling millions of stocks each 3months and you will see where is real microsoft stock price
P. Douglas

Microsoft has a perception problem. When MS began to advertise Windows a lot in old media like TV, its stock went from $24 / share to about $31 / share. After MS stopped doing this, its stock fell back to around the $24 / share level. MS needs to counter its perception problem with ads to the general public (particularly on TV) geared specifically towards improving its image. MS is saddled with the same image problem that dogged IBM in the 80s and early 90s, which affects the most long term, dominant company in the PC market. I believe addressing its image problem continually needs to be seen as a cost of doing business. I see no better solution.

P. Douglas
http://intensedebate.com/profiles/vangrieg vangrieg

MSFT's revenue was 44bn in 2006, 58bn in 2009, their net income was 12.6bn in 2006 and 14.6bn in 2009. Nice story, but during the same period AAPL grew to 43bn from 19bn in terms of revenues and to 8.2bn from 2bn in terms of net income. During the last quarter, they made some 16bn in revenues and expect to have around 19 next quarter. In a nutshell, in less than three years AAPL became at least the same size as MSFT from being less than half of it.

There's no mystery in why it's traded at a premium.
http://intensedebate.com/profiles/vangrieg vangrieg

Oh, and one more thing. If you take into account that AAPL is now roughly equal to MSFT in terms of revenues with a slightly lower profit margin (judging by the last quarter results), and then look at the fact that it has about the same overall market capitalization, you'll find that the market values their growth opportunities roughly equally – they are either skeptical that AAPL can keep the momentum or value MSFT's growth products quite highly, or both.
http://intensedebate.com/people/chinch chinch

um… the stock market is quasi-fraudulent and ultimately manipulated by a select few much like a casino.

it indicates nothing whatsoever except what said manipulators push the general public to funnel their cash into. Obviously pyramid schemes work best with GROWTH so in that sense MS doesn't fall into the "get a bunch of aholes to invest & speculate" category. as others pointed out they have too many stockholders already.

Analysts do bolster said manipulation by citing senseless facts and fear mongering to their advantage… ie. KIN cost MS $240 million. How many day's profit is this actually? ROTFLMAO. However this "news" bolsters google and apple (and stock market manipulators) while hurting MS shares.

Not a rocket science you just need enough stupid investors to fuel the frenzy. And they NEED a constant frenzy or the economy collapses. Every transaction is $$$ earned for brokers (regardless of stock value).
chinch

BTW Don's "analysis" is absurd to the point of stupid & shortsighted

"billions more poured into Bing search efforts, don’t contribute to growth or profits. Billions more spent on acquisitions that didn’t work out are another big drain on cash and profits. Microsoft doesn’t need to do anything fancy."

Wall street morons would LOVE for MS to screw up & bankrupt it's future so a new flavor of the day would emerge…

wash… rinse… repeat (while hauling in major wall st. bonuses, etc.)

BING doesn't contribute to profit TODAY but it is the lynchpin of it's mobile future. What is Apple's future when iPhone is 15% global marketshare and smartphone sales no longer expanding rapidly?

arasheps

Then they will release iRubbish and iSheeps will sleep in streets to be in the line to get it and show it to their friends and it changes everything, again.

chinch

LOL… there is no new magical form factor for apple to iExploit. Hollywood won't cave to Jobs the way the music industry did. Analysts don't factor that Apple lacks a "steve is no longer with us" strategy.

Everything tech has converged in mobile and each day iPhone stays ATT exclusive (USA) is each day it's long-term marketshare lowers and lowers and lowers. This is basic mathematics, no hopes, dreams or iFanboys can change it. Verizon just added more new subs than ATT without iHype.