Sell Microsoft Like a Boss

Steve Ballmer is picking a questionable time to begin diversifying.

Microsoft's (Nasdaq: MSFT  ) billionaire CEO sold $1.3 billion worth of the software giant's stock last week, as revealed in an SEC filing after Friday's close.

"I am excited about our new products and the potential for our technology to change people's lives, and I remain fully committed to Microsoft and its success," reads an explanatory statement from Ballmer.

With confidence like this, who needs naysayers?

He's got a right to sell
Bulls are likely to blow this one off.

Sure, $1.3 billion sounds like a lot of money, but it's just 12% of Ballmer's stake in Microsoft. He's still holding on to 358.9 million shares, worth a whopping $9.6 billion based on Friday's close.

Tech companies are also loose with stock options as incentives to stick around and excel, so who knows how large his stake will be if he sticks around long enough.

Ballmer isn't done dumping, though. Ballmer plans to sell up to 75 million shares this year as part of a move to diversify his portfolio and for tax planning purposes.

Fearing that income taxes on capital gains will inch higher for high earners, can you blame Ballmer for cashing out a bit? Don't be surprised if other well-heeled CEOs follow suit.

You've got a right to sell, too
The timing of Ballmer's first wave of selling in seven years is still lousy.

Ballmer sold his shares at price points between $26.60 and $27.48 over the last three trading days.

He sold -- and will sell more -- despite Microsoft appearing to be in decent shape at the moment.

  • Revenue at all five of Microsoft's divisions grew in its latest quarter.
  • Bing is gaining market share, and its deal to handle Yahoo!'s (Nasdaq: YHOO  ) search will boost mindshare, too.
  • The release of Windows 7 last year and Office 2010 this year are kicking off a new upgrade cycle.
  • The Xbox 360 has been the console system of choice in recent months, and Microsoft increased holiday sales projections for its new Kinect motion-based controller just before last week's debut.
  • Windows Phone 7 is finally a reality, even though it's got a long way to go before entering the conversation alongside Research in Motion's (Nasdaq: RIMM  ) 50 million BlackBerry subscribers and global leader Nokia (NYSE: NOK  ) .

Shares of Microsoft are also trading at attractive earnings multiples. Mr. Softy is fetching just 11 times this fiscal year's projected bottom line and only 10 times next fiscal year's target.

Unfortunately, the low valuation also comes with decelerating earnings growth. The pros see Microsoft's revenue and profitability growing at single-digit clips next fiscal year. I wouldn't be surprised if it gets even worse in the years to come.

The end of an era
I took some heat earlier this year, when I argued that Microsoft will never be great again.

In reality, one can argue that it hasn't even been pretty fair over the past few years. Microsoft is trading essentially where it was ten years ago, adjusted for dividends.

However, at least over this lost decade, Microsoft's earnings have grown. The stock has largely marched in place over the past 10 years, as multiples have come down to reflect the decelerating growth.

What happens if Microsoft's growth turns negative?

This isn't heresy. Linux-leaning Red Hat (NYSE: RHT  ) is proving that you don't need Windows to run enterprise software. Google (Nasdaq: GOOG  ) offers free -- and nearly free -- cloud-based solutions for the spreadsheets, word processing, and presentations that make Microsoft Office tick. Google's Android is also growing like a weed, as handset makers can build on the mobile platform for free. Apple's (Nasdaq: AAPL  ) App Store is the marketplace of choice for free and $0.99 games, likely accounting for the video game industry's funk since early last year.

On the one hand, you have a globe of rapidly developing tech-hungry nations where Microsoft's wares would be in obvious demand. On the other hand, you have the migration to open-source operating systems, apps, and enterprise software driving prices markedly lower.

Is Ballmer's massive stock sale surrender? No. Microsoft isn't going to zero. It's too rich in both cash and cash flow. Growth will decelerate and valuations may have to inch even lower, but no one is listing Microsoft as an endangered species.

However, if the next few years will be more of the same, you can't blame Ballmer for enjoying the value of his massive Microsoft stake. As cheap as Microsoft may appear to be, there's been a flurry of analyst downgrades lately. What if Ballmer sees it the way the pros do?

Follow Ballmer's lead -- perhaps getting out before his next wave of selling pressures the stock again.

Many of Rick's fellow Fools and newsletter analysts disagree with his bearish stance on Microsoft. Where do you stand? Share your tips in the comment box below.

Google, Microsoft, and Nokia are Motley Fool Inside Value selections. Google is a Motley Fool Rule Breakers pick. Apple is a Motley Fool Stock Advisor recommendation. Motley Fool Options has recommended a diagonal call position on Microsoft. The Fool owns shares of Apple, Google, 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.

Longtime Fool contributor Rick Munarriz still leans on Microsoft products in a major way. He does not own shares in any of the stocks in this story. Rick is also part of the Rule Breakers newsletter research team, seeking out tomorrow's ultimate growth stocks a day early. The Fool has a disclosure policy.


Read/Post Comments (3) | Recommend This Article (6)

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 November 09, 2010, at 1:50 AM, jesterisdead wrote:

    Why are you comparing an OS to handset makers? Windows Phone 7 does have a long way to go, though.

  • Report this Comment On November 09, 2010, at 2:19 AM, PostScience wrote:

    If 90% of your net worth was tied up in one stock, you'd sell it too.

    Entire corporate infrastructures are built around Microsoft technology, which gives Microsoft incredible pricing power.

    Their last quarter greatly exceeded expectations, and many of their new products have the potential to be hits.

    I'll take the 2.5% dividend and 15% earnings growth, thank you very much.

  • Report this Comment On November 09, 2010, at 6:33 PM, techy46 wrote:

    Bill Gates has been selling almost the same number of shares every year in MS for a very long time; 5-7 years. He nows has $55 billion in wealth of which MS is one third. Steve should sell 2/3 of his 440mil shares (290 mil) over the next 3-5 years and buy Intel and other companies like both Allen and Gates have done. Microsoft is a consumer and enterprise software company that like IBM does not live and die off of fanatic gadget buyers, investors and gamers. WP7 is a good phone OS and could easily sell billions of copies.

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