Microsoft stock tumbles on news of spending plans

The news Thursday that Microsoft would be trading higher profits in the short-term for long-term gains through greater investment sent the company's stock tumbling to a 52-week low.

After giving up more than 6 percent in after-hours trading Thursday, Microsoft shares closed down 11.4 percent, or $3.10, today at $24.15, a 52-week low, on extremely heavy volume.

The $32 billion in market value Microsoft shed today is roughly equivalent to one Costco plus one Getty Images.

In its first forecast for the 2007 fiscal year, which begins July 1, Microsoft outlined earnings that were well below Wall Street's expectations. The company said it expects to bring in $49.5 billion to $50.5 billion — a revenue boost of $5 billion to $6 billion — as it begins selling much-anticipated new versions of flagship products Windows and Office.

But Microsoft will spend more money, perhaps $2 billion over analyst expectations, on a dozen efforts within the company, including a high-stakes fight against Google and Yahoo! in the Internet services arena.

That spending increase equals lower earnings per share. Microsoft said it expects per-share earnings to be $1.36 to $1.41 in 2007; the Wall Street consensus was $1.53.

"We should still see about 20 percent earnings per share (EPS) growth in calendar 2007, but the investment spending will be disruptive to EPS growth for the balance of calendar 2006 and leaves investors unresolved on what the benefits might be of this radical acceleration in spending," Goldman Sachs senior analyst Rick Sherlund wrote in a note to investors this morning.

At least five Wall Street analysts downgraded their ratings on Microsoft's stock; two others lowered their share-price targets. The consensus 12-month target price, as measured by Thomson Financial, was $31.

For the fiscal third quarter, Microsoft reported operating income of $3.89 billion and profit of $2.98 billion on sales of $10.9 billion.

Revenues by business group and percentage increases from the year-ago quarter were: Client, $3.17 billion, up 8.5 percent; Server and Tools, $2.66 billion, up 14.4 percent; Information Worker, $3.11 billion, up 2.8 percent; Business Solutions, $214 million, up 20.9 percent; MSN, $623 million, unchanged; Mobile and Embedded Devices, $89 million, up 41.3 percent; Home and Entertainment, $1.04 billion, up 84.8 percent.

Benjamin J. Romano: bromano@seattletimes.com