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:
Why Wall Street didn't believe Steve Ballmer (and what he can do about it)...
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.
Related Posts:
- 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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The last research I saw said that only 6% of investment analysts consider blogs an influencing fasctor. That may well have changed but even now I come across many tech companies that wouldn't know a blog if it slapped them in the face. Trade media isn't much better - at least in EU. Here, their more likely to be an extension of the publishing foghorn.
Posted by: Dennis Howlett | June 21, 2006 at 06:27 PM
Good point...by the way blogging is not a sandbox comparable to the investment sandbox..it is a large universe and any one can blog about his/her ideas...Scoble blogging about Finance/Stocks is a little bit like a O'Reilly author trying to explain the concepts of finance to a Wall Street guy (such as yourself)...you are absolutely right that MSFT is not comparable as a stock to GOOG or Apple..MSFT has graduated to a more respectable, old, venerable company standard while GOOG is the new kid with lot of potential and future...a time will come when GOOG too will go the MSFT way but that is a while away...
Posted by: SR | June 15, 2006 at 09:29 AM
Jason, it would be similar to me saying "If Oracle wants to improve its image with customers it should do a better job briefing Gartner and Forrester". Buyers rely on many sources of influence - industry analysts being one, peer being input being another and slowly but surely input from technology blogs.
I am pretty sure institutional investors similarly do not just depend (and should not) on sell side analysis from Goldman and Merrill. So, Microsoft and other investor relations should be spending more time briefing technology investor oriented bloggers like you. If that is what he means by grassroots, I have to agree with Scoble.
But more than influence, as Bill says, it comes down to performance and execution. Microsoft's recent malaise has been around its product delivery and quality, not just image management.
Posted by: viinnie mirchandani | June 15, 2006 at 07:59 AM
Chris,
Congratulations on the sellout at Gnomedex; I guess it's too late to sign up for me too. :)
Don,
Excellent followup, and nice to hear the candor coming from another Microsoft employee. People forget that the investment community was really buying into the MSFT message finally (see my post on MSFT hitting a 52-week high), because they WERE being shareholder friendly (more so than the other big tech companies) and they had shipped SQL Server, XBox 360, etc.. and Vista is coming (eventually). But, as you pointed out, it's expectations that need to be better managed on all fronts (partners, customers, investors).
Mr. K,
While I see your side of it, this is something I'm going to have to respectfully disagree about. Microsoft can still pay its employees and prospects plenty; and as an investor they are one of the most responsible software vendors in terms of not being piggish with options grants. People tend to forget that Microsoft can lure top talent...Ray Ozzie, Steve Berkowitz and Niel Kennedy were recent top notch hires, for example.
Posted by: Jason Wood | June 14, 2006 at 09:13 PM
Robert,
I don't disagree that MSFT needs to do more on the grassroots front, I just think you summarily overstate the impact of their failure to do so while understanding the true market forces.
But you're right I do have a problem with the Vista disclosure, it all comes back to meeting or exceeding expectations. Vista was supposed to drive a major EPS jump in FY07...and now, even if it ships on time, the incremental investments to combat Google are offsetting much of the potential EPS leverage.
Bill, nice to hear from you! You're absolutely right that Microsoft is trapped between value and growth; as are so many tech bellwethers of old. CSCO, DELL, INTC, MSFT are all trading at near historic lows (in terms of multiples) but are struggling to unlock the value of their franchises (i.e., attract value investors) because collectively they've not shown a committment to increasing shareholder returns in a slow growth environment.
All the best to you both,
J
Posted by: Jason Wood | June 14, 2006 at 08:47 PM
Here's another item I'd like to politely add: Apple and Google are attracting employees while MSFT lately seems to be struggling to give their employees a reason to work there. It's part positive branding, but think about how much additional cost MSFT has to endure to keep employees. Their stock hasn't gone anywhere, so instead of handing out options in lieu of salary, they probably have to come up with additional, likely expensive perks.
I can see a new graduate weighing a job offer at AAPL, GOOG, and MSFT and accepting less salary to work at an exciting place like APPL or GOOG.
Posted by: Mr. K. | June 14, 2006 at 08:37 PM
Great post. I agree with the numbers and agree with Bill Burnham that MSFT has transitioned to a "Value" stock but management still acts like it is a "Growth" stock.
I wrote a post on this communications fiasco. Here is an excerpt;
Microsoft management did a poor job of communicating to Wall Street, during the April 06 earnings conference call, that next year we plan to spend about $2B more than analysts expected. The stock price dropped more than 20% wiping out $55B in market value. Microsoft management was incredulous. How could Wall Street react in such an immature way? How could a couple billion in additional spending wipe out $55B of market value? It is all about communication...and how you clean up your messes.
Microsoft should have communicated a clear plan, ahead of the earnings call, for how we planned to "invest" the money in new business opportunities, and the expected time frame to see results. Instead, it was suggested to analysts during the conference call that they should add $1.5B to $2B to their spending estimates for next year. It was only later, after the severe stock market reaction, that Microsoft "scrubbed the numbers" and clarified that it would be more like $1B, and gave clearer guidance on where the money would be invested. Too late. The market has already decided that given all the delays with "Longhorn/Vista" that the payoff for this $1B investment could be much longer than expected.
How could $1B in investment cause a $55B reaction? It is actually a rational response. The initial claim was additional spending of $1.5B to $2B. Wall Street applies a P/E multiple to earnings. Well it works both ways, that P/E also gets applied to spending which results in lower earnings. The P/E was around 21 at the time, so 21 times $2B is $42B of market value. The remaining $13B of lost market value is probably over reaction that may disappear over time.
You can read the whole post at http://dondodge.typepad.com/the_next_big_thing/2006/06/scoble_explains.html
Posted by: Don Dodge | June 14, 2006 at 08:30 PM
He couldn't get into Gnomedex, anyway - we just sold out the main room. ;)
Posted by: Chris Pirillo | June 14, 2006 at 07:51 PM
MSFT is caught in the "no man's land" between growth and value and rapidly headed towards value land thanks to the #s you cite.
I don't think Ballmer should spend 1 minute on Wall Street. Complete waste of time given that his company has plenty of sell and buy side coverage (not to mention has every move analyzed to death in the press/blogsphere).
MSFT has to focus on building break out products that drive capitally efficient earnings (as you suggest) doing anything else is a waste of time.
Probably a fool's errand given how big the company is to begin with, but it's better than wasting your time doing one-on-one's somewhere deep in the herd on Wall Street.
Posted by: Bill Burnham | June 14, 2006 at 07:28 PM
I agree with your suggestions too. But isn't it interesting that you don't think we've explained the Vista ship slips well enough? My friends who are tech geeks on the street say that too.
The slip happened cause we tried to put too many features into Vista without understanding the ability of our developers to actually get the work done. Worse, we were trying to build features on top of platforms that weren't finished yet. When the management figured out we were building a skyscraper on top of shifting sand they pulled the whole thing down and started over about two years ago.
We didn't explain what happened very well cause we didn't have a good story to tell while we were tearing down the skyscraper and restarting from scratch on a new foundation.
The thing is, if we had explained that well both the grassroots and you would have understood it.
The fact we didn't is one of my failures and something I wish I could have gone back and done more about.
Posted by: Robert Scoble | June 14, 2006 at 06:27 PM