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

The reason for Microsoft's horrible performance may be staring back at you in the mirror.

Aug 3, 2014 at 8:33AM

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.

Jamal Carnette has no position in any stocks mentioned. The Motley Fool recommends Intel. The Motley Fool owns shares of Intel, International Business Machines, and Microsoft. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

4 in 5 Americans Are Ignoring Buffett's Warning

Don't be one of them.

Jun 12, 2015 at 5:01PM

Admitting fear is difficult.

So you can imagine how shocked I was to find out Warren Buffett recently told a select number of investors about the cutting-edge technology that's keeping him awake at night.

This past May, The Motley Fool sent 8 of its best stock analysts to Omaha, Nebraska to attend the Berkshire Hathaway annual shareholder meeting. CEO Warren Buffett and Vice Chairman Charlie Munger fielded questions for nearly 6 hours.
The catch was: Attendees weren't allowed to record any of it. No audio. No video. 

Our team of analysts wrote down every single word Buffett and Munger uttered. Over 16,000 words. But only two words stood out to me as I read the detailed transcript of the event: "Real threat."

That's how Buffett responded when asked about this emerging market that is already expected to be worth more than $2 trillion in the U.S. alone. Google has already put some of its best engineers behind the technology powering this trend. 

The amazing thing is, while Buffett may be nervous, the rest of us can invest in this new industry BEFORE the old money realizes what hit them.

KPMG advises we're "on the cusp of revolutionary change" coming much "sooner than you think."

Even one legendary MIT professor had to recant his position that the technology was "beyond the capability of computer science." (He recently confessed to The Wall Street Journal that he's now a believer and amazed "how quickly this technology caught on.")

Yet according to one J.D. Power and Associates survey, only 1 in 5 Americans are even interested in this technology, much less ready to invest in it. Needless to say, you haven't missed your window of opportunity. 

Think about how many amazing technologies you've watched soar to new heights while you kick yourself thinking, "I knew about that technology before everyone was talking about it, but I just sat on my hands." 

Don't let that happen again. This time, it should be your family telling you, "I can't believe you knew about and invested in that technology so early on."

That's why I hope you take just a few minutes to access the exclusive research our team of analysts has put together on this industry and the one stock positioned to capitalize on this major shift.

Click here to learn about this incredible technology before Buffett stops being scared and starts buying!

David Hanson owns shares of Berkshire Hathaway and American Express. The Motley Fool recommends and owns shares of Berkshire Hathaway, Google, and Coca-Cola.We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

©1995-2014 The Motley Fool. All rights reserved. | Privacy/Legal Information