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More of the Same for Microsoft Stock?

The announcement that Microsoft (MSFT) Chairman Bill Gates will extricate himself from his role as the giant's chief software architect by 2008 didn't do much for its languishing stock price. The stock closed 3 cents higher, at $22.10, on June 16. Just a few days earlier, on June 13, it brushed a 52-week low of $21.46. Microsoft must be used to it by now: Adjusted for splits, the stock has been stuck in the $20 to $30 range since early 2002.

The question is: Will the change in leadership give Microsoft stock a badly needed boost? Although analysts agree the company has plenty of potential to boost sales with new products, they don't see an immediate catalyst that will light a fire under the stock. For investors, that may mean more of the same is in store.

Wall Street analysts have been decidedly mixed on Microsoft. On the bull side, Standard & Poor's analyst Scott Kessler has a strong buy recommendation. Kessler says the Gates announcement has not materially changed how he views the company (see, 6/16/06, "Bill Gates's Long Goodbye"). He considers the tech bellwether to be a "large-cap, high-quality company that has market-leading businesses."

NEW-PRODUCT UPSIDE. One of the risks for the stock is product delays. Vista is the long-awaited, and already delayed, next edition of the company's Windows operating system. In addition, Kessler notes that Microsoft's short-term guidance disappointed Wall Street.

On the bright side, along with Vista he sees potential in the rollout of new products like adCenter, online advertising software for the company's Web search. The company could also gain market share against Sony (SNE) in video-game consoles. Sony's PlayStation 3 is due out later this year and has a high ticket price. Other analysts think Microsoft's presence in handheld gadgets and Internet-protocol television could pay out handsomely in the future.

Despite Microsoft's reporting improved income over the last few years, the stock price has failed to climb. The company has ceded ground to Internet search competitors like Google (GOOG) and Yahoo (YHOO), and others are perpetually on the horizon.

Indeed, the last notable shock to Microsoft's share price came in April, when the company said it would make major investments in areas where it is not the leader (see, 4/28/06, "Microsoft's Strange Spending Splurge"). Investors didn't like the news, and sent the stock down 11% in one day.

LOSING THE LEADER. Even so, Kessler sees plenty to like. He points out that the shares, trading at a price-earnings ratio of 17.5, compared with Google's 68.5, are cheap. Plus, Microsoft's 1.6% dividend doesn't hurt.

Taking a less enthusiastic view, Merrill Lynch analyst Kash Rangan said in a research note that the absence of Gates could have a more severe impact as he has been "a much revered, powerful, and motivating leader within the company." He adds that Gates leaving "post-Vista would have been nice." (Merrill has an investment banking relationship with Microsoft.)

Rangan, who has a neutral opinion on the stock, says he "continues to believe that Microsoft is well-positioned longer-term" as it emerges from its "sustained period of investment."

LONG-TERM OPTIMISM. Larry Tankel, an analyst with pension fund TIAA-CREF, which held 81.8 million shares in Microsoft as of its last filing, says the company "certainly [has] a lot of things they work on that have great potential," even as the competitive environment shifts away from the areas where it has traditionally been the strongest.

Peter Misek, an analyst with Canaccord Adams (which also has a banking relationship with the company), rates Microsoft a hold. He points out that the company faces fierce competition and says the shares have perhaps idled during a "transition in the shareholder base" as value managers have replaced growth-oriented investors (see, 5/15/06, "Mixed Signals From Microsoft"). He speculates that once Microsoft's current stock buyback is finished at yearend, another one could be possible, a move that might boost earnings per share.

Like other analysts, Misek has an optimistic view of Microsoft's long-term potential and says the new chief software architect, Ray Ozzie, could be an inspirational boost for developers and engineers. In the meantime, the real question for the company's future, and stock price, is whether management can execute on its boundless ambitions. Microsoft, he says, is "developing in so many areas that trying to keep control and focus is a monumental challenge."

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