Posts filed under “Corporate Management”
There is an old market saw about how the leaders from one bull market are not the leaders in the next bull market.
That’s true for a number of tech stocks: Dell, EMC, Cisco, Sun — and its especially true about Microsoft:
I have never been a big fan of the Mister Softee. From a tech standpoint, their products are kludgy and unimpressive; Their strong suit is not Innovation — it is relentless, incremental improvement, eventually leading to a decent if underwhelming product. What they end up producing are the lowest common denominator bloatware that can be easily managed by a corporate IT staff.
It is a great cash flow machine. Its the monopoloy, stupid.
From an investment perspective, there are 2 key issues to observe: first, they are a mature company whose fast growth days are well behind them. They are too big to be responsive, too expensive to be a value stock, too slow growing to be a growth stock. In short, they are in the process of morphing from the software PC leadership company to nice, quiet, money machine. I would expect a good entry purchase (i.e., from lower levels) could throw off gains of 10-15% a year, including dividend.
The second thing to observe — and all too many investors overlook this — is that the money is in the monopoly products. Except for Windows and Office, pretty much everything else is 3rd rate money-loser, with SQL as the exception. They have a few products that have slowly began to move up the scale, and their hardware products aren’t bad, but note where the lion’s share of their revenue, and nearly all of their profits come from: the Monopoly.
They continue to lose market share to Google in search (Don’t believe the vaporware hype); Their blogging product is a 4th rate ghetto; MSN continues to lag, losing share and money; X-box is a multi-billion dollar loser (no one else would have/could have thrown so much cash at merely hurting Sony); They keep pushing back Vista — thats a function of how sprawlingly large and apparently disorganized they have become as an institution; Oh, and I am still awaiting their iPod killer, first mentioned by them about 30 months ago.
I remember the days when the mere mention of Microsoft moving into a product area would disrupt the competition, force delays in other company’s purchases, and crush competitor’s stock prices. The vapor announcements have lost their punch; that strategy is no more.
Outside of the monopolies of Windows and Office, there is SQL Server database software — which has been garnering more share — and not a whole lot more. Lest you think I exaggerate, go read their quarterly statement.
While I have no faith that management can aggressively boost future sales outside of their monopoly products, it almost doesn’t matter. If you buy it now, your biggest risk may be death by boredom. This will eventually become cheap enough to buy where it will be reliable if boring old money machine; I just don’t think we are there yet . . .
Update: April 28, 2006 9:33am
I wrote this up yesterday while awaiting Microsoft’s earnings; MSFT opened down 11% to make a new low $23.60; I would be a buyer in the high teens/low 20s (technically, $22- $22.50) — so we are not quite there yet . . .
Also, see David Pogue’s NYT column on the new Internet Explorer, who notes that the product hasn’t been upgraded in over 5 years!
Update 2: May 5, 2006 12:38pm
John Dvorak discusses 8 signs that the software giant is dead in the water in The Microsoft malaise
Update: April 28, 2006 11:38am
Cramer joins the Microsoft skeptics . . .
Microsoft 5 year chart
Over a year ago, I noted the decaying customer service quality in a few companies: In particular, Dell got named as a significant offender. (More recently, I complained about obnoxious Dell preinstalls).
I collected a ton of emails from readers about consumer complaints (mostly from January 2005).
I should have paid closer attention. Although I did not have a position in Dell, I missed the opportunity to short it.
Since that deluge of criticism in January 2005 the stock has underperformed dramatically, down 35% from over $41 to under $27. The stock was recently downgraded to a SELL at Citigroup — see that red bar down towards the far right on big volume? That’s the downgrade. The sell rating was due in part to customer service complaints.
The XM chart shows that I am already late to this kvetch-fest — it looks like XM may already have had their Dell moment — the stock is down even more — a 50% haircut from $40 to $20. Ouch!
There’s only so much any company can cut their "basic business concept" before they start causing a problem with their consumers. That obviously happened at Dell, via the degradation of their "vaunted customer service" and it appears to be going on at XMSR.
Quite bluntly, if your business model is based on a specific concept, you screw around with that at your own risk. For Dell, it was cheap and direct sales coupled with great customer service; Saving a few pennies by outsourcing/cutting back on support, and/or switching to cheaper components (as some readers have complained about with Dell) seems to be corporate suicide.
For XM, it may be that cutting the variety of their offerings will be their Waterloo. Their raison d’etre seems to be a broad and deep variety of eclectic channels. But as Chrissy Hyndes sang so long ago: But you mess with the goods doll, honey, you gotta pay. *
Here’s the post that started the calvalcade of complaints:
"I keep getting e-mail from disgruntled XM subscribers. That their favorite channel, #51, Music Lab, has bitten the dust. I’ll print one below.
This is totally fucked up. The promise of satellite radio was to go deep, to provide something for EVERYONE! But the new regime at XM, the Infinity assholes, are turning XM into the bullshit terrestrial radio that they came from. And this makes me CRAZY!
First came channel 49, Big Tracks. With the INANE tagline "Our Classic Rock". This is just the kind of b.s. unlistenable terrestrial classic rock stations use. And the station’s got no DEPTH! Just the same fucking tracks over and over again. With no surprises.
But now it’s worse. Music Lab was booted and what did we get? MORE HITS CHANNELS!!!
We’ve got XM 17, U.S. Country, Country Superstars of the 80s and 90s.
How about XM 26, Flight 26, Modern Hits 90s and Now.
Or XM 30. Hitlist. TODAY’S Hit Music.
Or 68, The Heat, RHYTHMIC HITS!
Or 91, Viva, Latin Pop Hits.
Oh, they brought back Liquid Metal, which had been banished before, but what we’ve now got is endless b.s. hits stations, replicating what is ALREADY AVAILABLE ON XM, their only saving grace being no commercials.
This is a big deal. This is like the death of free-format FM radio, but WORSE! The golden era is OVER!
And what about the people who subscribed to XM ONLY for Music Lab? People like Craig Anderton, the electronic music and instrument GURU! Who signed up for two years, EXPECTING he’d be able to listen to his kind of music. Which he could get nowhere else, which is why he subscribed to XM.
The lunatics have taken over the asylum. DO NOT SUBSCRIBE TO XM! They don’t have Howard, and the people now running the place have their heads up their ass."
Reader responses follow . . .
UPDATE: May 23, 2006 8:21am
Nice mention of this post in Wes Phillips’s Stereophile Column this week
All of XM’s Trials
Stereophile, May 21, 2006
UPDATE: May 24, 2006 5:21pm
Geesh! The stock got shellacked today on a downgrade on subscriber expectations:
XM, the nation’s largest satellite radio provider, lowered its subscriber forecast, citing unexpected weakness in demand for its satellite radio service as well as potential legal pitfalls from a recording industry lawsuit.
It now expects to reach 8.5 million subscribers by the end of 2006, lower than its previous guidance for nine million customers by year’s end. The company had 6.5 million subscribers at the end of the first quarter.
Shares tumbled on the news, losing 11%, or $1.76, to $13.75 at 4 p.m. on the Nasdaq Stock Market.
The WSJ streak of taking very interesting columns and hiding them on Saturday continues.
Yesterday, they asked: Are some CEOs reaping millions by landing stock options when they are most valuable amatter of dumb luck — or something else?
"On a summer day in 2002, shares of
Affiliated Computer Services Inc. sank to their lowest level in a year.
Oddly, that was good news for Chief Executive Jeffrey Rich.
annual grant of stock options was dated that day, entitling him to buy
stock at that price for years. Had they been dated a week later, when
the stock was 27% higher, they’d have been far less rewarding. It was
the same through much of Mr. Rich’s tenure: In a striking pattern, all
six of his stock-option grants from 1995 to 2002 were dated just before
a rise in the stock price, often at the bottom of a steep drop.
lucky? A Wall Street Journal analysis suggests the odds of this
happening by chance are extraordinarily remote — around one in 300
billion. The odds of winning the multistate Powerball lottery with a $1
ticket are one in 146 million.
Suspecting such patterns aren’t
due to chance, the Securities and Exchange Commission is examining
whether some option grants carry favorable grant dates for a different
reason: They were backdated. The SEC is understood to be looking at
about a dozen companies’ option grants with this in mind.
Journal’s analysis of grant dates and stock movements suggests the
problem may be broader. It identified several companies with wildly
improbable option-grant patterns. While this doesn’t prove chicanery,
it shows something very odd: Year after year, some companies’ top
executives received options on unusually propitious dates.
analysis bolsters recent academic work suggesting that backdating was
widespread, particularly from the start of the tech-stock boom in the
1990s through the Sarbanes-Oxley corporate reform act of 2002. If so,
it was another way some executives enriched themselves during the boom
at shareholders’ expense. And because options grants are long-lived,
some executives holding backdated grants from the late 1990s could
still profit from them today."
The chart below implies that the odds against these being random are quite high. (I guess Sarbanes Oxley didn’t root out all the corporate corruption after all).
Last week it was the mortgage resets, and this week its CEO Options. Great stories, buried on the front page — of the Saturday edition . . .
The Perfect Payday
CHARLES FORELLE and JAMES BANDLER
WSJ, March 18, 2006; Page A1
How the Journal Analyzed Stock-Option Grants
WSJ, March 18, 2006; Page A5