New analyst, new take on Microsoft
Tables are turned on Sarah Friar, Goldman Sachs' new lead software analyst. She's the one having to meet high expectations, especially for...
Seattle Times staff columnist
Tables are turned on Sarah Friar, Goldman Sachs' new lead software analyst.
She's the one having to meet high expectations, especially for coverage of Microsoft. Ever since Goldman handled Microsoft's stock offering back in 1986, it has seemed to have an inside line on the company's direction. That made Friar's predecessor, Rick Sherlund, perhaps the most influential software analyst until he left for a hedge fund in March.
But the era of the bigfoot analyst has passed, done in by others' ethical lapses during the last boom.
Also gone, for now at least, are Microsoft's glory days on Wall Street.
Back in the day, investors leapt on product details that Sherlund ferreted out of Redmond. I remember being on conference calls where the tenor changed and the stock moved immediately after Sherlund weighed in.
Friar watches products, but she's more focused on broader market trends, such as the prevalence of Microsoft holdings in growth and value investment funds. Her approach may be better suited to Microsoft's current situation
Despite Microsoft's huge profits and the array of new products executives described at last week's analyst meeting, investors remain ambivalent about the stock that made many of them rich in the 1990s.
Friar is upbeat about Microsoft and believes the stock will reach $37 within a year, but she raised eyebrows in April when her debut report removed it from the firm's "conviction list."
A native of Northern Ireland who studied engineering at Oxford and business at Stanford, Friar, 34, joined Goldman as a technology investment banker in 2000.
She's also raising two children, including a boy born 13 weeks ago, just after she took over software coverage for the company. Last week she took a break from maternity leave to fly up from San Francisco for Microsoft's meeting.
During an interview, Friar seemed undaunted by Goldman's Microsoft legacy and the challenge of explaining the enigmatic stock to her skeptical clients. Here's an edited transcript of our conversation. There's more of it — including discussion of products such as Zune, Xbox and Vista — on my blog.
Q: What was it like to take on Microsoft coverage for Goldman?
A: It was a little daunting because you look at a company this size, you think it must be so complicated. In some ways it is. If you get stuck in the detail of Microsoft you might never come out again because there's so much going on.
On the other side, I think from an investor standpoint, Microsoft is actually in some ways more simple than a lot of the smaller names I cover. They do a very good job breaking it up into their various business divisions. Also they know how to do accounting; they know how to message to the Street.
There's actually a lot more information available, so in that regard it's easier — you're not pounding the street as much trying to worm out an Excel data point that you wouldn't get from a smaller company.
Q: So you think it's transparent?
A: Yes, I think they do a fairly good job. I think sometimes they can be a little opaque. When the Street gets really upset about something like their capital structure, they have a tendency to shut down a little bit and to not want to talk about it at all, and because they're Microsoft, they can kind of do that.
Often a small company will come under a lot more pressure to be open. It's hard to pressure Microsoft, I think.
Q: For a while Wall Street wanted Ballmer's head. I was hearing people say he's got to go. What do you think about the leadership?
A: I don't hear as much anymore — as much pushback on Steve. Particularly with Bill stepping aside, that was a very well-managed transition.
Ray Ozzie has come in to be seen as more of the innovation leader of the technology side, so right now I don't think anyone wants Steve to go because they want the stability of a face they know, someone who knows the company very well and knows the business side of the company so well.
But I think they would like to see some changes, whether it's Steve or just how the company thinks more broadly.
One of the biggest frustrations I hear out there is why, in what has become a more mature industry, why are we still running the company like it's a startup or a young high-growth company because it's not.
That means in my mind you mature up the capital structure, take on some debt — you lower your cost of capital — you also could do a really substantial stock repurchase.
Q: So the $100 billion in buybacks and dividends wasn't enough. Since that didn't move the stock a lot, I wonder if they'll be gun-shy about another huge buyback.
A: I would still say they didn't really do it in size. Sure it sounds like a big number, but relative to what Microsoft could do, it's really not that big.
I think they have to keep coming back and trying again and again.
If you look at other big mature companies: IBM, their stock has actually moved very nicely in the last couple of months since they did their accelerated stock-repurchase program, so it's a good role model to look at.
I just feel it was too little and they need to come back and do more to really grab the attention of the portfolio manager.
Q: Is that what it will take for people to get excited about Microsoft stock again?
A: I think we need a catalyst like that and I don't think it can be a technology catalyst because there's just not one out there that's big enough to move Microsoft's earnings one way or the other. I think it has to be something else, and to me the capital structure is the easy something else.
Q: How about buying Yahoo?
A: That's the other. If there are two catalysts that would attract people's attention, it would be buying Yahoo or something of that size.
Online services, why do people care about it so much? Well it's about Microsoft being able to create a business in an area that's been high growth.
Also, a lot of the underpinnings of the online services business is the infrastructure to support their on-demand offering, so it has to be successful from that perspective, too.
They have definitely stumbled, and I think what people fear is this is not something where Microsoft can take 10 years, like server and tools, to get good at it because, by that stage, the war will be lost to Google or whoever it is, but really Google.
So they need to do something quicker, which probably means inorganic growth. They made the first step with the aQuantive acquisition, which I give them full kudos for.
Q: Is there a lot of pressure on you, following Rick Sherlund's coverage of Microsoft?
A: I jokingly say that if I could fill half of Rick's shoes I'd accomplish something great in my life.
I think no, because Rick came at a different time. He obviously had the advantage of being there as Microsoft became public and was just so connected into all of these senior guys, a lot of whom have actually left the company. I just don't think you can copy that — that is just the end of an era, in a way.
When I wrote my April report on Microsoft and called it "end of an era" I was alluding to the fact Vista was out and now you have to move on to the next thing, like Live computing, but it was also my own little internal joke about the Sherlund era.
Brier Dudley's column appears Mondays. Reach him at 206-515-5687 or email@example.com.
Copyright © 2007 The Seattle Times Company
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