Several portfolio managers and analysts remain bullish on Microsoft Corp. stock, but some fear long-term effects from the company's antitrust battle with the Justice Department.
Microsoft last week settled a lawsuit with the Justice Department, agreeing to allow personal computer manufacturers to ship the current version of the Windows 95 operating system without also being forced to install its Internet browser software. The agency had sued Microsoft in October, charging the Redmond, Wash., company was forcing PC makers to install its browser, in violation of a 1994 antitrust settlement.
Bob Finch, investment manager at Aeltus Investment Management Inc., Hartford, Conn., said the settlement was good news for the company and that Microsoft's growth should be driven by several new products to be released later this year, including Windows 98 and Windows NT 5.0.
Walter Price, a portfolio manager and technology analyst at Dresdner RCM Global Advisors, San Francisco, said Windows NT is extremely important for Microsoft.
"It's a wonderful operating system, more robust than earlier Windows products," he said.
He forecasts it will drive the company's growth in 1999 and that Microsoft could ultimately be the most valuable company in the country. General Electric Co. is 30% larger in terms of market capitalization. He sees the stock price surging to $200 by the end of 1999.
But some experts are concerned that the Justice Department is gearing up to build a larger case against Microsoft, targeting Windows 98. However, Microsoft officials said last week that the product would be shipped on schedule. Mr. Finch said he expected Microsoft would prevail in upcoming lawsuits. He pointed out that its rival Netscape Communications is giving away its browser and opening up its development code - something Microsoft cannot do because its code is in its operating system - and that will allow the two companies to differentiate themselves from each other.
Aeltus owned 1.3 million shares of Microsoft on behalf of its clients as of Sept. 30, according to CDA/Spectrum, a unit of CDA Investment Technologies, Rockville, Md.
Mr. Price said he sold about 20% of the 4.83 million shares Dresdner held in Microsoft after the lawsuit was announced because of the adverse publicity surrounding it.
"The company has not handled the legal battles well. They have shown a certain amount of arrogance, which does not sit well with the government or the press," he said before the settlement.
However, Microsoft seems to be making an attempt to fix that, Mr. Price said. And its strategy of incorporating competitors' products into its operating systems is a good one, he said.
Brian Goodstadt, a research analyst who follows the stock for the Standard & Poor's Equity Group, noted Microsoft still is the dominant company in operating systems, with 85% of the market.
The company also has been gaining in the Internet market, doubling its share to 40% over the past seven months. Competitor Netscape's share slid to 60% from 73% in that period, he said.
Jon Hickman, managing director of strategic growth portfolios at Wells Capital Management, San Francisco - which holds around 1.08 million shares - said the stock price jumped 52.9% in 1997, starting the year at 85 and closing at 130. He said he would trim his position if it hit 150 and add to it if it fell below 120.
The stock, which rose to a high of 1503/4 in October, slid back to the 130s, where it has remained, since the lawsuit was announced. It closed at 1385/8 on Jan. 22. It was at 138 1/2 at 2: 15 p.m. Eastern Time on Jan. 23.
Mr. Hickman and other experts on Microsoft are optimistic about its prospects because of the new products. Windows NT 5.0, due out in the fall, will boost revenues for some time to come, Mr. Hickman predicted.
"The government has a tough fight, since Microsoft's products are so much better than its competitors'," Dresdner RCM's Mr. Price said.
Making inroads
Microsoft has been making inroads into other areas, such as gaming and entertainment, cranking out a lot of new software titles every month, said Well Capital's Mr. Hickman. It has introduced a Windows CE operating system to power consumer appliances, cars and Web-TVs, Mr. Hickman said.
Microsoft also is trying to position itself in the cable-TV market, he said, in the belief that it is going to become more interactive.
"Television offers Microsoft another delivery system for their software, and they want to try to influence how things will be done, which is why they have recently bought stakes in Comcast Corp. and Tele-Communications Inc. They also did a recent cross-licensing deal with Gemstar International, which has the on-screen TV guide," he said.
"Now that there are a lot of powerful PCs available for under $1,000, it allows Microsoft to sell more software and lots of applications, which will also add to revenues over several years."
He has held the stock for a long time and expects its earnings and revenues to grow 30% to 35% over the next three years.
Some analysts predicted growth will slow over the next two quarters, until the fall, when Windows NT is launched. But over the longer term, they see earnings growing 25% to 35% annually.
Ned Brines, senior research analyst at Roger Engemann & Associates, Pasadena, Calif., which held 1.49 million shares as of Sept. 30, according to CDA/Spectrum, is another Microsoft bull.
"The thriving low-end PC market is great for Microsoft because it earns the same licensing fee for its software, whatever the cost of the PC," he said. "So the more PCs that are sold, the more licensing fees it takes in."
Legal fight 'ironic'
Mr. Brines calls the legal fight ironic. He points out that when the browser is unbundled from the operating system, customers would have to pay $49 for it, and they would.
Several pension funds have big stakes in the software giant.
Brian Pacheco, spokesman for the $126.5 billion California Public Employees' Retirement System, Sacramento, said Microsoft was the fund's fourth-largest holding as of June 30 and that CalPERS owned 7.03 million shares as of Jan. 4. Six million shares are in the indexed equity component, the remaining million under active management.
The State of Michigan's $40 billion pension fund owned 2.8 million shares as of Dec. 31, most of it actively managed internally, said acting Director Roy Pentilla.
More than half of Microsoft's 1.2 billion shares outstanding as of Sept. 30 were held by index funds, CDA/Spectrum figures say.
Indexers with large stakes include: Vanguard Group Inc., Valley Forge, 12 million shares; Bankers Trust Co., New York, 16.6 million shares; and Barclay's Global Investors, San Francisco, 33.1 million shares.
