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Don’t Blame Microsoft’s 'Lost Decade' on Steve Ballmer

By now, most people know the story of Microsoft's (NASDAQ: MSFT  ) "lost decade." Generally referencing Steve Ballmer's reign at the company and hallmarked by a market capitalization stuck in reverse, it's a cautionary tale of a company becoming too complacent and overly wedded to a core product.

However, as is true in many cases, common conceptions are misconceptions. And while mistakes were made, the shocking cause of Microsoft's "lost decade" isn't Steve Ballmer – it's actually Microsoft investors.

Perhaps it's time to admit that Ballmer's time at Microsoft wasn't a disaster. Source: Wikimedia Commons

In defense of Steve Ballmer
Steve Ballmer is in many circles considered an affable second-place finisher. He's a real-life version of Charlie Brown, with Apple's Steve Jobs pulling the football out from under his kick at the last minute. And to be fair, he's done some things to deserve this caricature – among them, laughing at the iPhone when it was in the nascent phases and spearheading the Surface RT disaster that resulted in a $900 million writedown. 

But that doesn't mean Ballmer didn't have successes. After taking the reins of Microsoft early this century, he grew revenue 10% a year, from $23 billion in 2000 to $62.5 billion in 2010. Not only that, he grew Microsoft's bottom line 7% per year and instituted a dividend policy that went from $0.08 a share (split adjusted) in 2003 to $0.52 per share by 2010. Overall, this seems like a solid, albeit not flashy performance. However, as far as market capitalization goes, this is what happened to the company:

MSFT Market Cap Chart

MSFT Market Cap 2000-2010 data by YCharts

A victim of the times ... and past success
In many aspects, Microsoft was a victim of the times and its own past successes. The PC revolution of the '90s continued a tremendous period for the software king, forming one part of the "Wintel monopoly" -- with Intel supplying the chips and a multitude of OEMs -- Hewlett-Packard, IBM, and Dell -- providing the finished product. The company was such a formidable foe in operating systems, the U.S. government eventually filed an antitrust suit against Microsoft for anti-competitive behavior.

Not only that, it was a time of "irrational exuberance" (read: bubble) in the tech markets, with any company with the words "net" or ".com" in them becoming overnight successes. A great example of the times was AOL's purchase of Netscape, paying $4.2 billion for a mere browser. It seemed as if Silicon Valley was minting millionaires daily.

Wall Street and Main Street got the memo; they may have not understood the technology, but they understood a hot investment. By 1999, Microsoft was valued well more than a half-trillion dollars, clocking in as high as $620 billion. Bid up by aggressive and irrational investors, Microsoft traded at more than 70 times earnings. In order to bring its PEG, or price-to-earnings growth, ratio down to one, it would have to grow earnings an astonishing 70% per year over a five-year period. That's a tall order for any company, let alone one that reported $8 billion in net income in fiscal 1999.

MSFT Market Cap Chart

MSFT Market Cap 2000-Current data by YCharts

You want 70% growth; I'll give you 7%
Eventually, the bubble burst. A minor recession, Sept. 11, and several high-profile tech failures forced investors to look at tech companies with a more critical eye. As a result, Microsoft's lofty valuation tumbled.

In the meantime, the company's performance was a mixed bag. XP's late 2001 launch was considered a success, the company launched the Xbox video gaming system, and the antitrust case was finally decided. On the other hand, operating income barely budged. It came in lower than the 2000 total in two out of the next four years, and it was barely higher the other two.

Net income growth during the first half of the decade was hard to come by. Hurt by legal settlements and losses on the cable investments more than core operations, Microsoft's net income didn't exceed its 2000 total until 2005.

By 2006, Microsoft traded at a more reasonable P/E ratio of 20 times earnings. Although the company started to perform well financially in the latter part of the decade, investors have a new "can't miss" tech company: Apple.

Constant fears of the PC's decline, a protracted recession, and growth concerns drove Microsoft's market cap to $150 billion -- nearly 75% lower than its all-time high in 1999, although net income is 50% higher. Since then, Microsoft has continued its amazing run and has rebounded to a $350 billion company.

Final thoughts
While it is easy to blame a CEO for a company stuck in reverse, it isn't always right. Microsoft's "lost decade" can be thought of as almost a case study of fear and greed. And while he could be faulted for many things, Steve Ballmer did an admirable job running the company, all things considered. Irrational investors are more to blame for Microsoft's sluggish performance by bidding it up to stratospheric levels, not Steve Ballmer.

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Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On August 03, 2014, at 1:20 PM, GW1000 wrote:

    This article is all about the past. Who cares about the last decade. Investors want to know if MSFT is a good investment going forward. Is MSFT a good investment now or not?

  • Report this Comment On August 03, 2014, at 2:07 PM, TMFJCar wrote:


    Thanks for reading the article. What I wanted to do was use Microsoft's story in order to discuss valuations and irrational investors. As you can see, although the company performed well it could not support the valuations.

    Part of successful investing (in addition to counting cash flows, determining product market share, and understanding competition) is behavioral finance -- in short, how rational and poised are you. This is something many of our writers do well --Morgan Housel and Dan Caplinger are just a few.

    That was what I wanted to convey here. I wanted to rebut the common consensus by telling this story to an audience wider than just current Microsoft investors, I wanted all investors to (hopefully) learn something here.

    Thanks for reading!

    Jamal Carnette -- the author.

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Jamal Carnette

After working at The Motley Fool, Jamal Carnette decided to try his hand at writing for a change. You can find him writing about technology, consumer goods, sports, and pontificating on any competitive advantage. His previous jobs include Mortgage Trainer, Financial Advisor, and Stockbroker. Jamal graduated from George Mason University with a bachelors of science in finance and is a CFA Level III candidate. Follow me for tech trends, info on consumer brands, and sports banter.

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