Why do stock analysts have so much power?(updated)
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 Appleâ€™s numbers by over a billion, but in spite of all that, their stock price fell while Appleâ€™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.Â He states thatÂ 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 Streetâ€™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 Microsoftâ€™s spending on the Kin phone, Bing and other acquisitions is also puzzling because even with the so called â€œfailuresâ€, MS still made more money and beatÂ 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. Donâ€™t get me wrong, these two companies make good products, but there is no way they should be valued at ten timesÂ more than MS. Windows phone 7 and KinectÂ will also feature new innovations that are not present on the current â€œhotâ€ platforms.
The folks over a valuecruncher.com somewhat share my sentiments. They note
Here is the comment I left on Donâ€™s post:
I agree that the market is valuing $MSFT more like HP ($HPQ) or IBM ($IBM) than Apple ($AAPL) or Google ($GOOG) â€“ 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 $IBM â€“ EBITDA margins as only one metric.$MSFT has a great core business that will endure for a while yet. The market is placing a pretty low value on that business â€“ 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 â€œestimatesâ€ instead of â€œrealâ€ values! I amÂ 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 â€œcoolâ€ as the other guys. Can somebody please set me straight if Iâ€™m wrong?
Update: Bob Caswell provides a longer detailed argument in the links below (via techmeme)