I’m currently experiencing writer’s block when it comes to writing about spam so I thought I’d post my thoughts on the recent action of Microsoft’s share price.
One thing companies do to encourage employees to stick around is offer them shares or stock options, which is the right to buy shares at an agreed-upon strike price. This strike price can be higher or lower than the current share price, but usually it’s lower. I think that due to SEC and FASB regulations in recent times, stock options are becoming less popular. So, companies are left with stock.
In my opinion, shares are only an effective mode of compensation and enticement to stick around if there exists a good chance that the value of the shares will be worth more in the future than they are now. Part of the problem with Microsoft shares is that they are worth no more today than they were 5 years ago. Since mid-2002, shares in Microsoft have traded between 22 and 30, and between mid-2003 and mid-2006, they have traded between 25 and 28. Buying shares in the company at the start of any of those two periods would not have yielded any significant gains. Adjusting for inflation, assuming you bought at the average price your shares are worth less today than they were a few years ago. On the other hand, had you held the stock itself rather than options, Microsoft pays a 1.5% dividend so you would have recovered some losses.
I think part of the problem is that the greatest driver of share price is earnings growth. Microsoft is such a large company that it is difficult to increase its earnings quickly, particularly since it is a 30-year old company. I used to think that being such a large company it was immune to substantial volatility but I was proven wrong in late April when the stock gapped down 3 points in a day, the most in years. It’s difficult to say where the stock is going but just by looking at the stock chart I see some considerable overhead resistance around the $24 level. Can Microsoft recover? It’s earnings are actually half decent and it is getting into new businesses (like Exchange and a host of other services, pun intended).
Speaking personally, just by going off the technicals (ie, the price movement on the chart), I think I would prefer a cash equivalent to invest in other stocks rather shares of the company itself. I think Microsoft probably has good long-term prospects but my bet is that there are quicker gains to be made elsewhere.