Dueling Fools A Microsoft Duel
Bull Rebuttal

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Dueling Fools
By Paul Larson (TMF Parlay)
October 17, 2001

Rick first harps on what he perceives as a lack of growth at Microsoft. Using pro-forma numbers for 2001, he says earnings will only grow in the single digits for 2002. He's not incorrect, but using his pro-forma numbers means Microsoft's streak of years with earnings growth is untouched. Use the "as reported" numbers I originally cited and the streak is broken, but growth next year looks stronger.

Either way, the numbers need a little perspective. First, this year has been one of the worst on record for the PC industry, and Microsoft has fared much better than others in the industry. While others are seeing negative growth and copious amounts of red ink, Microsoft is still standing tall and growing. Albeit the growth might not be as high as when the economy was humming along, but any growth in this environment is impressive.

Moreover, this year represents a year where Microsoft is in a transitional period with three major product launches underway -- Windows XP, Office XP, and Xbox. Due to marketing blitzes and the costs related to getting projects out the door, the most expensive time for these products is the launch. Interestingly enough, the year in which Microsoft had the lowest margins over the last decade was 1995, right when Windows 95 was hitting the street. Could we be in one of those times when Microsoft's exceptional profitability takes a mild and temporary dip?

Let's also look at the company's top line, which is still growing at an amazing clip for a company Microsoft's size. Last year, the company grew its revenue 10.2% to $25.3 billion. This fiscal year, revenue is expected to ring in close to $28.8 billion, or roughly 15% growth. Fiscal 2003 finds the analysts calling for $33.3 billion in revenue, about 18% year-over-year growth. Yes, Microsoft is actually accelerating its growth, not slowing down.

Rick then says that Microsoft's "story" over the next few months has anything but a happy ending. I would agree that the company's new products are being launched in a very chilly economic environment and that upgrades will be a harder sell in the past. That said, almost every new PC that is sold will still be shipped Microsoft operating systems, and it is only a matter of time before the clutch also engages for the upgrade market.

Is Microsoft a value today? Like I said initially, I wouldn't call the company cheap, but the quality of the company makes the stock deserve all of the premium it garners today. There's never been a company that has the financial track record that Microsoft has, nor has a lead been so durable. Plain and simple, Microsoft is a winner, and the factors that have made the company what it is today do not look to change for the foreseeable future.

Paul Larson owns a PC running Microsoft Windows, researched the company using Internet Explorer, wrote this piece using Microsoft Word, and sent it to his editors using Microsoft Outlook. He also owns a stake in Microsoft. You can see what he owns online thanks to The Motley Fool's progressive disclosure policy.

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