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Mathew Ingram

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Growing pains

Mathew Ingram

TORONTO (GlobeinvestorGOLD) Spring is here a time for cleaning up the basement, the garage, and perhaps the investment portfolio as well. And just as it can be hard to get rid of those old knick-knacks you've got lying around the house, or the old bicycle you've been meaning to fix up, it can be difficult to part with some of your favourite stocks, even though you probably should.

Take Microsoft, for instance. It's a stock many investors have become pretty attached to, and it's easy to see why. It's the world's largest maker of software for PCs, and has a virtual stranglehold on the desktop market with an almost 90-per-cent share. Its Windows operating system and Office software suite are cash machines unlike almost any other, with fat profit margins and a guaranteed upgrade cycle that is as good as money in the bank.

The giant company has close to $40-billion (U.S.) in annual revenue, and has about $35-billion or so in cash on hand, and despite its enormous size it has no debt whatsoever. There is absolutely zero risk that any significant number of users will suddenly stop using Microsoft's Windows operating system, and to make things even better the company has settled most of the major lawsuits and anti-trust actions that were hanging over its head for the past few years.

There's just one problem with that rosy picture, of course, and it is this: The stock market doesn't reward a company that maintains the status quo, regardless of how big or successful it might be. The market wants to see growth, and that's where Microsoft has been coming up a little short lately and where it will likely continue to come up short for the foreseeable future. That means any funds you have invested in the shares might as well be dead money.

For the past six months or so, in fact, an investment in Microsoft has been worse than dead money, it's been shrinking money. From about $30 in November, the stock has fallen by about 15 per cent although some of that drop was a result of the $34-billion special dividend the company paid out to shareholders in November. Even apart from that, however, the shares have been lacklustre at best, and the reason is simple: the lack of any obvious force driving growth.

In other words, the market has gotten over its sense of relief at the resolution of the anti-trust issues and other lawsuits (although Microsoft is still dealing with competition officials in Europe), and is looking for a reason to buy the stock and can't seem to find one. Yes, the company has plenty of cash, which pours in at the usual pace, but that isn't enough to get investors very excited.

The fact is that the engine behind most of Microsoft's business is Windows and the related Office software suite, and the next big boost for that business isn't expected until late next year at the earliest, when Microsoft releases its next upgrade to Windows known as "Longhorn." One possible reason for the market's loss of interest is that the upgrade has been pushed back several times, and that has left Microsoft shares in a vacuum. And the market abhors a vacuum.

Outside of the Windows business, there are very few growth drivers for Microsoft. The Xbox game console is still a money-losing proposition, and so is the "smart phone" software business, and that seems unlikely to change. Hotmail and MSN are not huge cash generators either, and to make matters worse the company is facing increasing competition from Linux the open-source operating system when it comes to the corporate server market, one of Microsoft's mainstays.

Some of the analysts who follow the company argue that the Longhorn upgrade cycle is worth waiting around for, and that when it comes it will produce billions of dollars a year in extra revenue for the company. But you still have to wait around for a year and a half before you find out whether that's going to come true or not, and even then it's not clear how much that's going to mean for Microsoft's share price.

Could the stock bounce from its current level? Sure it could, but a big upward move is unlikely or at least unlikely to last long. So why not put your shares in the software giant on the table with the rest of the stuff for the garage sale, and spend your money on something that's going to give you a little bit more oomph.

Mathew Ingram joined The Globe and Mail's online news team in June of 2000, after spending four years as the Western business columnist, based in Calgary.

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