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Microsoft Warning No Surprise


By Frances Hong and Hal Plotkin
CNBC.com Reporters
Dec 14, 2000 07:15 PM

Given the weakness in the PC market and high-profile warnings by box makers like Compaq Computer Corp. {CPQ} and Gateway Inc. {GTW}, it is no surprise that vendors down the PC food chain would get hit, too.

The latest victim: Microsoft Corp. {MSFT}. Yes, even the giant software maker, a company that has done a good job escaping sector hits in the past, has succumbed to slowing demand in the consumer sector.


Microsoft 52-week stock price

Late Thursday, Gates & Co. warned that weakness in the worldwide market would hurt its fiscal second quarter and lowered estimates to 46 to 47 cents a share. The company also lowered revenue estimates for the full fiscal year by about 5%, citing among other factors, the worsening outlook for sales of new computers to both consumer and corporate markets. Trading in Microsoft’s shares were halted after the bell.

“The slowdown is not taking any prisoners,” says analyst Frederic Dickson of Branch Cabell. “This is not devastating; it was widely expected. Had Microsoft warned, say, back in July, it would have lost 15 to 20 points in the after market. Right now, it’s only shaved a few points off.”

Microsoft’s announcement comes as little surprise to technology watchers who have seen many similar warnings from a slew of PC makers and microprocessor firms recently. The bigger question, though, is whether the downturn is a long-term trend or just another bump in the road.

PC Group: Don’t Hold Your Breath

With the PC slowdown already discounted in its price, don’t expect Microsoft to tumble much further. According to Dickson, the near-term risk for the stock is in the low-50s. He maintains his “strong buy” rating and 12-month target of 75.

Microsoft shareholders probably don’t have much to look forward to when it comes to sales of new PCs, which account for about 10% of the firm’s revenue. Despite Thursday’s bad news, however, there could be renewed interest in the stock if some of the other threats that Microsoft faces continue to recede.

Prior to Thursday’s warning, analysts polled by First Call Corp. had expected a profit of 49 cents for the fiscal second quarter and $1.91 for the full fiscal year ending in June. Microsoft’s current projections now call for earnings for the full fiscal year to come in about 10 cents a share lower.

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