REDMOND, Wash. -- Institutional investors cheered Bill Gates' Jan. 13 announcement that he was promoting Steve Ballmer to chief executive officer.
The move freed Mr. Gates to focus on his first love, software development, and the challenge of the Internet, the areas where he could add the most value, they said.
Although Microsoft Corp. has a number of challenges to negotiate before its stock price hits higher levels, shareholders said, institutional investors have not lost faith in Mr. Gates' Midas touch when it comes to creating technology and making money.
And they are far more focused on the company's Internet plans and the management change than on possible outcomes of the company's antitrust battle with the Justice Department.
In addition to its well-publicized legal problems, the software giant needs to address its Internet strategy, overseas growth and slow Office 2000 sales before the new company motto -- "Empower people through great software any place, any time and on any device" -- becomes reality.
Still, institutional investors remain bullish on the stock, even though it has underperformed some of its technology brethren, said Jay Nakahara, portfolio manager of the INVESCO GT Technology Fund, New York. The firm owned 3 million shares of Microsoft stock as of Sept. 30, according to CDA/Spectrum.
So far, Microsoft has had a soft quarter, mainly because of Y2K-related decreases in corporate PC spending, Mr. Nakahara said.
"I would view most of that as non-recurring," he said.
On Wall Street, the stock price dropped 5.6% last week, to close at 106 Jan. 20, following reports that the company's earnings were lower. Overall, Microsoft's stock price has dipped 9% so far this year.
Mr. Nakahara predicts the next three months will be crucial because Microsoft is releasing its Windows 2000 software in February, which may help boost sales of the Office 2000 software package.
"Microsoft has always been a good investment when there is an uptake in a new product cycle," he added.
Mr. Nakahara also views Microsoft as the most valuable Internet investment today -- contrary to most other equity analysts who see Microsoft lagging behind in web technology.
Internet strategy emerging
Mr. Gates' new role as chairman and chief software architect leads investors to expect a more solid Internet strategy to emerge in the coming months.
The main issue is Microsoft's strategy for making software accessible over the Internet and creating software for small, hand-held devices, said Patricia Haffner, director of equity research for Banc of America Capital Management Inc., St. Louis.
Overall, the Internet will continue providing growth for the company in light of "a strong track record to offer solutions," she said.
"We feel strongly that the long-term merits (of owning the stock) continue to be as strong today as in the past," Ms. Haffner said.
Banc of America Capital Management owns 18 million shares of Microsoft stock, she said.
"We view the management change as evolutionary, not revolutionary," Ms. Haffner said.
"Bill Gates is going back to his first love, technology and products," said George Gilbert, portfolio manager of the Northern Technology Fund offered by Chicago-based Northern Trust Co. Northern Trust held 31 million shares of Microsoft as of Sept. 30, according to CDA/Spectrum.
Mr. Gilbert said the Internet is the company's largest challenge, since it doesn't hold the same footing on the web that it does in the PC world.
Lee Spelman, vice president in equity research at J.P. Morgan Investment Management Inc., New York, expects "something significant" to come out of the company's Internet strategy. (Microsoft is a core holding for J.P. Morgan, though she wouldn't say how many shares the firm owns.)
But the plan for implementing that strategy -- Next Generation Windows Services -- seemed vague, based on what was said in a conference call with Mr. Gates at the time of Mr. Ballmer's promotion, she said.
She doesn't believe the frequently cited rumor that Mr. Ballmer's rise to CEO was connected with the Justice Department's antitrust case against Microsoft.
"I don't know anyone who describes Steve Ballmer as soft," Ms. Spelman said in response to speculation that the company may be more likely to be broken up as a result of the management change.
Other analysts also have discredited any connection between the case and Mr. Ballmer's assumption of day-to-day business activities.
INVESCO's Mr. Nakahara expects the outcome of the Justice Department case to be important to investors and to the future of the company. "Investors want to just put this behind us," he said.