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Microsoft shares hit by biggest sell-off since 2000, $30 billion market cap wiped out
Shares of Microsoft dropped 11.4 percent today, representing the biggest single-day drop in over 13 years. The last time it occurred was on April 24, 2000, when shares plunged 15.6 percent as the world's largest software company locked itself in an antitrust dispute with the U.S. government. Since then, Microsoft has never experienced such a shelling, until today that is. This came after the software company posted dismal quarterly results due to weak demand for its latest Windows system and poor sales of its Surface tablet.
Microsoft share prices plunge more than 11% today
Friday's loss means more than $30 billion has been wiped off Microsoft's market value in one day, equivalent to the entire GDP of countries like Jordan or Bahrain. Investors were shocked that the earnings were wrecked by a $900 million write down on the value of unsold Surface tablets after it cut prices in a bid to excite buyers. Meanwhile, the struggling PC market continues to take its toll on Microsoft's core Windows businesses as its transition to a devices-and-services company remains uncertain.
Wall Street had expected the company's strength with business customers would help it ride out a downturn in consumer PC sales. The results provoked fresh skepticism of Chief Executive Steve Ballmer's new plan to reshape the company. "The recent reorganization does not fix the tablet or smartphone problem," said Nomura analyst Rick Sherlund in a note to clients on Friday. Sherlund suggested that activist investors will pressure Ballmer to reconsider his strategy this summer, a reference to ValueAct Capital, which took a $2 billion stake in Microsoft in April and is widely expected to push for a board seat soon.
"This (the results) was much more disruptive than investors have expected, with Microsoft missing its guidance in every division and guiding lower," wrote Sherlund. Other Wall Street analysts were similarly dismayed by Microsoft's latest financial report. Brokerages Raymond James and Cowen & Co cut their ratings on Microsoft stock by a notch to "market perform" and at least five others trimmed their price targets by as much as $3.
Microsoft RT Surface tablet failed to gather steam
FBR Capital Markets analyst David Hilal said Microsoft's revenue from Windows operating system in the fourth quarter was 9 percent below his expectations. "The key potential growth drivers (Windows 8, Surface) of the Microsoft story appear to be fading, heading into FY14," Hilal wrote in a note. Earlier this week, Microsoft said it was drastically cutting Surface prices to entice buyers, reducing the value of the devices in its inventory. Microsoft launched Surface tablets last year to challenge Apple Inc's iPad, but their sales have failed to meet expectations.
Janney Capital Markets analysts said the write down was an admission that Microsoft's first attempt in the tablet market had not been successful. On the other hand, Microsoft also said that it expected revenue from Windows software to continue to fall due to a weak PC market. "We know we need to do better," said Amy Hood, Microsoft's chief financial officer, its Windows PC operating system witnessed a 6 per cent fall in revenues from a year before.
At $19.9 billion, Microsoft's revenues for its latest quarter came in some $850m short of Wall Street's expectations, with the Windows division accounting for the biggest slice of the shortfall. The business division and server and tools group also failed to meet analysts' revenue hopes. Net income reached $4.97 billion. At 59 cents, earnings per share came in well below the 75 cents Wall Street had expected. The only successful Microsoft products are the Xbox, where subscription is on the rise, and search engine Bing, where market share has grown rapidly, but they are tiny compared to Windows and Office.
The world's largest software company must now try hard to diversify its businesses
Microsoft's decline is a consequence of the changing dynamics of the tech world. From a stock market perspective, the real question facing Microsoft in the aftermath of their fourth quarter miss is whether Steve Ballmer and his team will shine in moving away from the PC, and the perpetual license model, and into the cloud and mobile, subscription based cloud solutions model. But investors should be reassured that Microsoft has a growing war chest, with cash, cash equivalents, and investments totaling $77 billion to fund its diversification attempt. $77 billion is the entire annual national revenue for countries like Taiwan.
"Microsoft is far from on death's door," says Gartner tech industry analyst David Cearley. "They are aggressively addressing a wide range of market challenges. Yes, they still have significant execution challenges, but, going forward, they remain a strong player in the market."
After nearly 13 years as CEO, Steve Ballmer seems to have little to show for his tumultuous tenure. Consecrated by Bill Gates as his successor in 2000, the Jewish manager inherited Microsoft at the peak of its powers. Such was the dominance and success of Windows at the time that it would go on to be accused of antitrust and anti-competitive practices in the U.S. and European Union, respectively. Ballmer is currently Microsoft's second largest shareholder after Bill Gates.
CEO Steve Ballmer's performance continues to disappoint
Under Ballmer, Microsoft made a list of blunders, the most significant of them is the delayed launch and commercial failure of Windows Vista in 2007, but there have been other expensive missteps. There was the $8.5 billion overpriced acquisition of Skype. Then the troubled $5 billion alliance with Nokia. Don't forget the $6.3 billion write-down for the failed online advertising firm aQuantive. And finally, the $2 billion investment pledge to take Dell private.
In 2012, Forbes described Steve Ballmer as "the worst CEO of a large publicly traded American company". Many agree that this ignominious title is well deserved. The negative coverage has taken a toll. In March, a Glassdoor survey found only 47 percent of current Microsoft employees approved of Ballmer's performance as CEO. In the past 12 to 18 months, there has also been growing dismay among industry pundits, analysts and shareholders with Ballmer and his caravanserai of calamity. These critics believe Microsoft has lost its vision under Ballmer because he is not a visionary by temperament.
But with best friend Bill Gates and the board's endorsement, Ballmer's position appears safe for now. Today battering share prices however, cost Gates $1.6 billion. Microsoft's biggest shareholder currently own 4.8 percent of the company's stocks after years of selling and diversification. Cascade Investments, established by Bill Gates to manage his wealth, has invested into approximately 26 different companies, with Microsoft making up a mere 16 percent of its portfolio. According to Bloomberg daily tracker, Bill Gates is currently the world's richest with a net worth of $73.9 billion after having re-overtaken Mexico's Carlos Slim Helu, who is worth $67.2 billion.
Stakes in Microsoft accounts for 16% of Bill Gates' total wealth
Bill Gates lost $1.6 billion today!, Microsoft shares plunge 11.4%