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Brier Dudley offers a critical look at technology and business issues affecting the Northwest.

October 4, 2010 at 1:12 PM

Goldman to Microsoft: Do more with less, sharpen the axe

The Goldman Sachs research note slamming Microsoft – and tech stocks in general today – isn’t just ripping the Redmond company’s mobile efforts.

Goldman’s saying the future of its Windows franchise is a concern. It also wants Microsoft to give more of its cash directly to its investor clients.

Just a few weeks after Microsoft raised its dividend 23 percent – and after a crazy streak returning a historic $148 billion to investors since 2002 – Goldman’s saying Microsoft needs to go further.

Goldman wants Microsoft to get attention by giving back $10.5 billion next year, or about half of the free cash it’s expected to generate in the 2011 fiscal year.

“This level would provide an attractive return in a low-yield environment and potentially attract a new investor base,” the report said.

Goldman downgraded Microsoft to neutral from buy and cut its target for the stock from $32 to $28. It closed down 2 percent, at $23.91 today.

It’s like the firm’s trying to milk a dying cow.

It said Microsoft’s stock has been affected partly by investment funds that “have broadly flown out of equities and into bonds this year,” and sold off shares to invest in hot category leaders like Apple and F5 Networks.

Corporate tech buyers are also being more cautious and pushing back some upgrade plans.

Still, Goldman seems to have soured on prospects for Microsoft’s business based largely on concerns about Apple and Google carving up the Windows PC franchise. This call is being made before Apple reports its first year of iPad sales and Android tablets begin shipping.

Goldman said sales of the iPad and other tablets won’t have much effect on Microsoft next year – maybe 3 percent of Windows revenue – but “longer-term concerns” about Apple and Google “have clearly” affected sentiment about Microsoft’s stock.

The firm suggested Microsoft needs to break-up its consumer business or lay off a bunch of its employees (create more shareholder value “by meaningfully stepping up cost discipline,” it said).

At the same time, Goldman says Microsoft has to hurry up and get a Windows tablet on the market, step up its cloud computing game, improve Xbox profitability and make sure the Windows Phone 7 rollout is a success.

Absolutely, get cracking. Microsoft needs to do something to get those businesses going. It’s getting embarrassing – and scary for the Puget Sound region that’s counting on Microsoft to get past the iPad and Android.

But to do those things, maybe the company should invest more of its cash in growing its business, instead of throwing it over the stern as a dividend, hoping to attract fish that otherwise don’t care about what it’s doing.

Microsoft has done what Goldman asks before and didn’t get more than nibbles. It grabbed attention by giving back more cash to investors than any company in history since 2002 and look what it’s done for the stock.

Instead of dumping or slashing emerging businesses, why not invest more in mobile devices, the cloud and gaming and start “betting the company” again?

If Microsoft wants to lead the mobile market overnight, it has the cash and credit to buy Research in Motion, which has a market cap of $26 billion. It could also buy the world’s biggest phone company, Nokia, for $38 billion, without breaking much sweat.

You’d think Goldman – the firm that took Microsoft public – would rather see those deals happen.

Comments | Topics: goldman sachs, Microsoft, tech stocks

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