Microsoft rally has analysts guessing

Microsoft stock burst out of a half-decade doldrums Friday after the company posted sales numbers that one analyst called "Google-like."

The better-than-expected 27.3 percent rise in first-quarter revenue reported late Thursday better resembled Microsoft itself in 1999.

Shares jumped 9.5 percent Friday, the 15th biggest one-day percentage gain since the company went public March 13, 1986. (No. 1 on that list was a 19.6 percent gain on Oct. 19, 2000, after, coincidentally, a better-than-expected first quarter report.)

The stock closed Friday at the circa-2001 level of $35.03, having added $28.9 billion to Microsoft's market value and buoying the Dow Jones Industrial Average.

But was this a one-time reaction to the numbers, or the first step in a march up the charts?

"I think this is signs of better times to come," said Brent Thill, analyst with Citigroup, who described the upside of Microsoft's quarterly report as "Google-like" in a note to clients. "Microsoft hasn't delivered anything like this for seven years. You look across all five major divisions, and they finally have legitimate cycles that are beginning to brew on each business line."

Citigroup does investment-banking business with Microsoft.

The average price target for Microsoft shares increased by about $5 to $39.25, according to data published on Bloomberg. Sixteen analysts updated their predictions on Friday.

The reaction of institutional investors and mutual-fund managers will have a major impact on whether Microsoft shares proceed toward the hills or the flatlands.

Many fund managers have allocated smaller chunks of their portfolios to Microsoft in an effort to beat index funds that are more heavily weighted toward the stock. Instead, these fund managers have invested heavily in other large-cap stocks, including Apple, Google, Intel and Research In Motion, said Walter Pritchard, an analyst with Cowen & Co.

"The index guys own it because they have to — because the index says they have to," Pritchard said. "For investors trying to beat the indexes, they have been underweight Microsoft because the stock hasn't worked for five years. ... If they decide that they've now got to own this thing, then the stock will move."

"That kind of psychological change is the most important thing," Pritchard added.

So is that change happening, or will it take another piece of good news?

Pritchard thinks the skeptics need more convincing.

"In my experience, a stock that has been kind of stuck in a range, usually after the first positive event, you still have a lot of people that are nonbelievers," he said.

Charlie Di Bona, an analyst with Sanford C. Bernstein, sees the conversion happening.

"I think some of the apathy is coming out of the stock around the investment base," Di Bona said. "It's too early to call it euphoria or excitement, but I think the boredom and dislike has worked its way out of the stock."

Bernstein's parent company owns Microsoft shares.

The October-December quarter, historically the strongest for Microsoft's Entertainment and Devices Division, provides the company with an opportunity for another big win.

Some analysts are expecting a merry Christmas at the tech giant on the strength of its video-game business and Windows Vista's first consumer holiday season.

Computers surpassed "peace and happiness" for the top spot in a recent 2007 holiday wish-list survey conducted by the Consumer Electronics Association.

Signs of the company's success in the quarter could come in PC sales data and holiday spending reports the weeks and months leading up to Microsoft's second-quarter earnings announcement, Jan. 24.

Another likely venue for news from the company is the Consumer Electronics Show, where Microsoft Chairman Bill Gates will give a keynote address, likely featuring Entertainment and Devices Division President Robbie Bach, on Jan. 6.

Benjamin J. Romano: 206-464-2149 or bromano@seattletimes.com