What's Wrong With Microsoft?

01/28/11 11:42:51 AM

by Koos van der Merwe

Microsoft reports good numbers. The share price rises, but then drops. Why?

Security: MSFT
Position: Sell

Microsoft's earnings were due out at close of market on January 27, but someone let the earnings out of the bag early. Fiscal second-quarter revenue came in at $19.95 billion, yielding earnings per share of $0.77, beating the consensus $19.14 billion and $0.68. For the fiscal year, Microsoft reaffirmed a forecast of $26.9 billion to $27.3 billion in operating expenses.

With 10 minutes still to trade before the market closed, Microsoft (MSFT) shares spiked rising $0.39, or 1.5%, to $29.17 and then promptly fell to close at $28.87. Why? The company is sound with outstanding products like Microsoft Office, which is a steady income earner. What's missing?

Simple... they are missing a Steve Jobs -- a man at the head of Apple Inc. (AAPL), the company that has an imagination that is almost Disney (which he is on the board of directors of). Steve Ballmer may be a highly efficient president of Microsoft, but he is staid. Instead of being a leader, he has become a follower.

Today, exactly a year ago, Steve Jobs unveiled the iPad tablet, a product that has changed the computer market. A year later, Microsoft has not offered a program or a product that effectively challenges the iPad.

FIGURE 1: MSFT, MONTHLY

Graphic provided by: AdvancedGET.

Figure 1 is a monthly chart of MSFT from February 1986. After all the splits MSFT has had, the price at that date works out at $0.20. The share price then rose to a high of $60.19 by December 1999 and then fell to $21.63 by December 2000. The chart shows how the share price has traded in the range of $21.63 to $38.08 since then, with a drop to $15.10 in March 2009, and a rapid recovery back to its trading range.

FIGURE 2: MSFT, DAILY

Graphic provided by: AdvancedGET.

Figure 2, a daily chart, shows how the MSFT share price went from $31.54 to $31.63. It then fell to $22.83, its long-term monthly support line at $22.83 before recovering to $28.86. The relative strength index (RSI) is at overbought levels and falling. The trendline drawn from the GAP to the low of February 8, 2010, is suggesting that at current levels, the share price has peaked.

Hewlett Packard bought Compaq, and a few years later, Palm for its brains and ingenuity. Microsoft has bought nothing, relying on itself. Admittedly, a rise from $22 to $28 is not to be sneezed at, but it is nowhere near the rise from $240 to $320 shown by AAPL. My advice to Microsoft? Look for a Steve Jobs and when you have found him or her, BUY.

Koos van der Merwe

Has been a technical analyst since 1969, and has worked as a futures and options trader with First Financial Futures in Johannesburg, South Africa.

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