Microsoft is currently the largest company in the computer industry. With a market capitalization of $291 billion, Microsoft has built an empire by dominating software sales for personal computers. Stock growth over the past 25 years has increased by more than 30,000%. However, Microsoft’s growth has substantially decreased since the market collapse of 2001(Niemond 25 April 2007).
From June 2004 to June 2005, Microsoft saw a 33% growth in net income. However, from June 2005 to June 2006, growth decreased to 2%. Investors consider net income to be the leading indicator for a stock price. To illustrate how the changes in net income affect stock prices, a time line is shown below. 6/30/04
Net income Change
In Microsoft’s 2004 fiscal year, a 33% increase in net income resulted in a 1% increase in stock price. In the 2005 fiscal year, a 2% gain in net income resulted in a 4% decrease in stock price (Microsoft Inc 2006). As seen, an increase in net income does not automatically lead to an increase in stock price. For growth companies such as Microsoft, stock price is primarily driven by the growth of earnings (25 April 2007).
Investors in the stock market judge earnings growth against two figures: the average industry earnings and the estimated earnings for the company. If analysts predict earnings to be above the industry average, a company’s stock price will usually rise. If companies report earnings higher than predicted, stock price will typically rise even more.
Since 1991, Microsoft’s earnings per share have risen each year. However, the percentage increase in these years has been decreasing (13 April 2007). This trend has not been well received by investors, as indicated by a net 0% change in the stock price over the past seven years.
The promise of a rewarding return from investing in Microsoft stock will be unlikely if current trends do not reverse. Because Microsoft derives the majority of revenue through software sales, the company must either enhance its current products or enter new markets to remain competitive. Business Plan
Recent data shows that 78% of computer users use Microsoft Windows as their primary operating system. Microsoft has also just released a new operating system known as Vista that competes primarily with Apple’s Mac OSX.
Van Baker, a marketing analyst, believes that the release of Vista may have pushed Microsoft closer towards meeting the higher expectations of today’s computer users. Although, he believes that these expectations may increase even more once Apple releases its newest operating system, Leopard (Bishop 2006).
The users of the Vista operating system will more likely be drawn from the current users of Windows, rather than from users of Mac OSX. This may restrict Microsoft’s market share because the growth of Vista will result in the erosion of Windows. Microsoft’s market share would remain unchanged if this occurred. Therefore, Microsoft’s short-term changes seem directed towards sustaining market share rather than growing market share.
Dell Computers Inc.
Dell Computers Inc. currently has the largest market share in personal computer sales. Of the $56 billion dollars in revenue in 2006, Dell generated 66% from the direct sales of computers and computer peripherals.
From 2005 to 2006, net income grew by 17%, compared to 15% the prior fiscal year. In 2005, the stock price declined approximately 24% (Dell Computers Inc 2006). This figure may not be fair considering Dell increased net income growth by nearly 20%. However, the market’s reaction is reasonable since Hewlett Packard, Dell’s closest competitor, saw net income jump by nearly 160% in the same year (Brophy 13 April 2007).
While Dell’s cumulative record over the long term has been...
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