I guess it's kind of hypocritical to rail against Scoble playing in my sandbox (investor) when, in fact, I'm blogging (which is more his sandbox than mine, at least in terms of popularity). But for as much as I usually like what the guy has to say and respect his role in growing the awareness of social media, he REALLY misses the mark in today's post:
Scoble attempts to answer the question of why Microsoft's stock is languishing and postulates...get ready folks, because they're not embracing the grass roots.
All due respect to the power of social media (again, I'm a blogger and an advocate), but Microsoft and its 10.2 billion shares are guided by far different forces than Scoble postulates.
While I encourage you to read Scoble's post in its entirety, let me highlight a few places he misses the mark...
That's an easy one. Cause he didn't convince the grass roots influence networks first. Why have Google and Apple done so well in the last three years? Cause the grassroots loves them. That's the powerroot of the industry. Ideas here don't come from the big influencers and move down. No, they start on the street and move up. Anyone miss how Google got big? Not by throwing a press conference.
Ahem...the difference between Microsoft (MSFT) and Google (GOOG) + Apple (AAPL) over the last few years has far less to do with their use of grassroots marketing and far more with three fundamental differences:
- Google and Apple have grown faster
- MSFT EPS (FY05-FY07): $1.16, $1.26, $1.41 (10% CAGR)
- AAPL EPS (FY05-FY07): $1.44, $2.19, $3.06 (46% CAGR)
- GOOG EPS (FY05-FY07): $5.64, $9.28, $11.95 (46% CAGR)
- MSFT Revenues (FY05-FY07): $39.7B, $44.0B, $49.2B (11% CAGR)
- AAPL Revenues: $13.9B, $20.2B, $26.1B (37% CAGR)
- GOOG Revenues (FY05-FY07): $6.1B, $10.0B, $13.4B (48% CAGR)
- (note: estimates provided by Citigroup)
- Google and Apple have created revolutionary product and service offerings (AdSense and iTunes/iPod, respectively) that dominate the landscape, Microsoft has not (in the last three years...it DID in its heyday). They aren't gigantic because the "grassroots technologists" are using them, they're enormous because they've captured the imagination and provide utility to the masses
- Google and Apple have consistently exceeded investor expectations, Microsoft has not
For a stock to maintain an upward trajectory that consistently outperforms the broader market, it has to combine fundamental strength, consistent delivery against expectations, and has to have momentum on its side.
Take a look at the consensus revenue and earnings estimates for AAPL, GOOG and MSFT over the last three years and then look at current estimates. The 'consensus' for two of those companies has gone up dramatically (over Scoble's imposed 3-year window), one has not. Care to guess which one hasn't?
Three years ago, conventional wisdom was that iPod was interesting but the economics of iTunes wouldn't be enough to move Apple's dial. OOPS. Three years ago, Google, by virtue of not providing guidance to the Street and absolutely capturing a massive trend in internet ad placement, set a bar that they've summarily smashed through year in, year out (while growing much, MUCH faster than Microsoft).
This is not to say a company that is no longer a high flier can't be appealing to investors. But in order to attract a value-driven investor base, a company has to deliver shareholder value in other ways.
- Increase margins
- Improve ROIC & ROE
- Generate increased cash flow from operations
- Use that cash flow in shareholder-friendly ways
- Buyback stock in the open market
- Pay a dividend (and increase the dividend consistently)
- Set expectations to a level where you can CONSISTENTLY EXCEED THEM
As a Microsoft shareholder, I've made no secret about my disappointment of late. When we initiated the position several years ago, I saw many things that made me optimistic. Microsoft had cleaned up most of its outstanding litigation, had put a considerable portion of its cash to work in the form of buybacks, a one-time dividend and a small ongoing dividend, and has seemingly put itself in position to show EPS leverage and acceleration for the first time in years thanks to a slew of new product introductions including, most importantly, Vista.
Yet, Vista has been delayed continually (with no good explanation) while feature sets are being pulled the make the deadline. And, Microsoft appears to have backed down from its plan of using cash in shareholder friendly ways to spend/spend/spend against new foes (read: Google). Ballmer and Gates and all the Microsoft folks REALLY need to clarify to the investment community what they want to be in the coming years. It's very difficult to buy into the notion that Microsoft is going to magically become a growth company again (particularly if it wants to maintain the current margin excellence); yet all signs point to that being the company's focus (including its fiscal policy).
Scoble goes on to say:
So, why is Microsoft stock price in freefall? Cause Steve Ballmer didn't come to the grassroots and convince him that Microsoft's business strategy makes sense. We still haven't explained, for instance, to the grassroots why Windows Vista matters. Or why spending $2 billion on server farms will make any sense to them. Or why the Xbox is going to be profitable.
What would I do? I would show up unannounced at three conferences. BloggerCon, Gnomedex, and BlogHer. No PR team there to spin. No lawyers. No video crew. And focus on answering those three things. Windows Vista. Investments in server farms. Xbox profitability.
Scoble is right to speak about clarifying the new infrastructure investments, Xbox's path to profitability and Windows Vista, but he's out of his gourd if he thinks Ballmer should be at BloggerCon, Gnomedex and BlogHer. Ballmer should be doing non-stop road shows with Goldman, Merrill and Citigroup to all the major institutional shareholders around the country for candid, one-on-one sessions. I know we bloggers get all worked up about the power of blogging, and tech.meme, and Technorati and the like...but let's not forget what really moves the capital markets. There's still a fairly wide disconnect between the social media world and the financial markets at their highest levels. Don't delude yourself.
- TechEd: Lobi and Office Systems Unveiled
- Scoble Leaving Microsoft
- Microsoft, Don't Forget Where Your Bread is Buttered
- Duet: The Captain and Tenille of Enterprise Computing?
- My Reaction to Tonight's Microsoft Earnings
- Scoble on What Ails Microsoft
- Ray Ozzie in Fortune
- Is Microsoft (finally) Ready to Battle RIM?
- Google Buys Writely
- Vista Versions Unveiled
- Don't Look Now...Microsoft Hits a 52-Week High
Note: At the time of this writing I, and/or funds I maintain discretionary control over, maintained a long equity position in MSFT but did not maintain positions (long or short) in AAPL or GOOG.
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