Microsoft ..... ML stuft auf "Long-Term Accumulate"

[Ralph]

Merrill cuts Microsoft to long-term accumulate

NEW YORK, Feb 8 (Reuters) - Merrill Lynch analyst Henry Blodget said Thursday he assumed coverage of Microsoft Corp. (NASDAQ:MSFT) and cut his rating to a long-term accumulate from buy, citing concerns that the personal computer industry is maturing and its new businesses are having an immaterial impact.

Shares of Microsoft were off more than one percent, or 7/8, at $63-13/16, in active early morning trade. Shares were up about 30 percent from a near-term low of $43-7/16 in late December.

The software giant's dependence on the desktop will make sustainable earnings per share growth of faster than 10 percent a year very difficult, even if its consumer and enterprise businesses are successful, Blodget said in a research note.

Currently, Blodget estimated that 95 percent of Microsoft's operating profit comes from the desktop business. Merrill estimates that the desktop business will only grow five to seven percent a year over the next five years.

Blodget said Microsoft's stock might continue to perform well in the near-term given its cash flow and financial strength as investors look for quality stocks and anticipation builds about the launch of new versions of its core Windows and Office products, Office XP and Windows XP.

However, he thinks Office XP will have a much smaller impact than the last office upgrade and Windows XP may not prove to be an incremental growth driver. Blodget does not expect it to be a major upgrade for business customers and it marks a major upgrade for consumers and should drive PC replacement sales.

The company's .NET Internet efforts should help sustain server and database revenue growth long-term.

Xbox, Microsoft's long-awaited video games console, is a potentially large opportunity, but still immaterial over next two years, Blodget said.

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Ralph

[Ralph]

The Upshot: Blodget Can't Be a Softie on Net Stocks Anymore
By George Mannes
Senior Writer
2/8/01 1:01 PM ET

Pop Quiz: Where would you rather park your retirement money? Microsoft (MSFT:Nasdaq - news) -- you know, that outfit over in Redmond, Wash., with $15 billion in pretax income in 2000?

Or maybe you'd prefer DoubleClick (DCLK:Nasdaq - news), the Internet advertising empire that lost nearly $105 million last year on revenue of $132 million?

Choosing between the two is the knotty problem now faced by Merrill Lynch Internet analyst Henry Blodget, who this morning assumed coverage of Microsoft with a near-term accumulate rating -- the same rating he has on DoubleClick. (Merrill has been a recent underwriter for DoubleClick, but not for Microsoft.) And, unfortunately for all Internet analysts, it points to a growing problem of what happens when Internet companies lose their mystique, and have to be judged by the same rules as everyone else.

Granted, Merrill does acknowledge there's a difference between the two besides that little profit disparity. Once you get past the headline ranking of accumulate, you'll see that Merrill awards DoubleClick an Investment Risk Rating of high, compared to Microsoft's incrementally safer above-average rank.

Over the long term, it gets more complicated. Blodget gives Microsoft a long-term accumulate, but DoubleClick the higher rating of buy. So DoubleClick might be riskier now, but it has the brighter prospects of appreciating over the long run.


Contrary to first impressions, Blodget himself says he doesn't think the two are the same, nor will one of the key audiences for his report -- the thousands of Merrill financial advisors around the country who counsel individual investors. They know the difference between DoubleClick's high-risk rating and Microsoft's above-average risk rating, he said in an interview Thursday with TheStreet.com: "'High risk' obviously means 'could go to zero,' " he says. "We don't think Microsoft is going to zero."

If you think Blodget has painted himself into a corner with the Microsoft=DoubleClick=accumulate headline, well, that's just another occupational hazard of the Net stock free fall. In 1999, when companies such as CMGI (CMGI:Nasdaq - news) and Amazon.com (AMZN:Nasdaq - news) soared to seemingly limitless heights, they didn't have to follow the rules non-Internet companies followed. They were grabbing market share in the great Internet gold rush, after all, and profits could wait.

Now people are judging Internet stocks just like car companies and department stores, on mundane stuff like revenue and earnings. This makes it harder for all analysts to write approving reports about Internet stocks, and especially tough for analysts such as Blodget who are straddling both worlds.

Which is why Hollywood celebrities keep their distance from you and me. If they're taking the subway just like everyone else, they'd be judged like everyone else. Are they shorter than you want your leading men to be? Do they have blemishes usually hidden by makeup? Maybe bad breath? In a perfect world, Net stocks would always be in a world of their own, just like Julianne Moore and Keanu Reeves.

TheStreet.com

Ralph