SIVY ON STOCKS from money.com
April 20, 2001

Bigger is better

Tech stocks are coming back, and giants that dominate important markets are
likely to lead the advance. At the forefront of that group is Microsoft, as
the company's latest earnings report shows.

By Michael Sivy

"It may be that the race is not always to the swift, nor the battle to the
strong -- but that is the way to bet," said Damon Runyon, whose short
stories about the hustlers of New York City's theater district served as
the basis for the musical "Guys and Dolls." Runyon's street-smart
observation is good advice for today's stock market. It may be that almost
all computer and telecommunications stocks were hurt in the Tech Wreck of
the past year. But not all of them will rebound equally as the economy
improves. Some dot-coms are gone for good. And many small tech stocks have
permanently lost market share. But the biggest tech companies, which
dominate important industry sectors, are likely to lead a powerful advance.

The next six months will be tough for technology companies, with excess
inventories and infrastructure overcapacity afflicting industries such as
semiconductors and telecom. But the longer term outlook argues powerfully
for a rebound. Over most of the past century, stocks have gained
substantially -- as much as 65 percent -- in the 18 months following four
straight interest rate cuts by the Federal Reserve. And as soon as
investors are convinced that the worst is past and that the outlook for the
next few years will be increasingly positive, they'll begin moving money
into the most solid tech choices.

That's essentially what has been happening with Microsoft [MSFT]. The share
price dropped to less than $41 in December. But since the Fed began cutting
rates in January, the stock has climbed a whopping 70 percent to nearly $69
a share. And on Thursday, Microsoft's rebound was reinforced by a
surprisingly good first-quarter report. It wasn't that earnings were so
high -- they were only a couple of cents a share above expectations. But
both analysts and investors were impressed by how well Microsoft's
businesses are holding up.

In the first quarter, Microsoft's revenues climbed 14 percent from
year-earlier levels. Sales were particularly solid for upgrades of the
Windows operating systems used by corporations and for server software. And
though the company indicated that earnings growth for the next couple of
quarters would be flattish, the revenue outlook remains quite positive. For
next fiscal year, which begins in July, earnings are projected to improve
by a bit less than 10 percent.

That near-term growth alone can justify Microsoft's 35 P/E, based projected
earnings for next year. But investors aren't looking at current profits.
They want to know whether the franchise is strong -- and whether it's
getting stronger. The answer to both questions is yes. And since Microsoft
is a massive cash generator -- with $30 billion in liquid assets -- it
shouldn't ever have to worry about financial problems.

Microsoft provides such a broad range of software products that it can
thrive even if sales of personal computers remain low. Further, the
company's large established base of users means that upgrades can boost
revenues even when sales of new software products are unimpressive. Most
important of all, by the end of the year Microsoft will have upgraded most
of its important products. That means that the world's software giant
figures to be at the forefront of the next market advance once the current
bear market is clearly over and the economy is in an upswing again.

###

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