Microsoft Is Worst Dow Stock of Year

By Douglas A. McIntyre Published Jan 31, 9:00AM EST

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Poor earnings have hurt Microsoft Corp. (NASDAQ: MSFT) so badly that its share price drop is the largest among the 30 Dow Jones Industrial Average stocks so far this year. American Express Co.’s (NYSE: AXP) loss is a very tiny tick better for the same period, as is the drop of JPMorgan Chase & Co. (NYSE: JPM). The software maker’s stock is off 13.2%.

The quarterly earnings problem may be overblown, if Microsoft can grow much, much faster in the cloud sector. However, first Microsoft will need to get around the perception that its revenue was bolstered almost entirely by its handset business last quarter. Total revenue for the period rose from $24.5 billion in the period a year ago to $26.5 billion. However, Microsoft did not have any revenue from “phone hardware” in the quarter last year. This year the number was $2.3 billion. While much of the anxiety about the numbers was centered on Windows (devices and consumer licensing), the artificial boost from phones tells more about the ground Microsoft’s other businesses have lost, or are barely gaining.

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Microsoft management continues to flog the value of its venture into cloud computing. That revenue growth is impressive. But Microsoft has cast it in a way that does not take into account the fierce battle within the industry. The headline was that commercial cloud revenue rose at a three-fold rate “for the sixth consecutive quarter.” Additionally, Microsoft promoted that its cloud business has reached an “annualized run rate of $5.5 billion.” That is very little at a company with annual revenue of about $100 billion.

The sharp drop in Microsoft shares is not just because of lackluster earnings. Wall Street despises a surprise. From the year-ago period to last November, Microsoft’s shares were up by 30%. By a day after the earnings report, analysts scrambled to downgrade their share price and earnings targets.

Skepticism rises when a company posts such a great disappointment. Microsoft’s cloud initiative will get much more scrutiny now that the company has proven its other businesses are so vulnerable. A slew of large tech companies need a large cloud presence to show they have bright futures. These range from sector leader Amazon.com Inc. (NASDAQ: AMZN) to desperate International Business Machines Corp. (NYSE: IBM).

Microsoft risks being the worst performing Dow stock for much of the year — or longer.

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About the Author Douglas A. McIntyre →

Douglas A. McIntyre is the co-founder, chief executive officer and editor in chief of 24/7 Wall St. and 24/7 Tempo. He has held these jobs since 2006.

McIntyre has written thousands of articles for 24/7 Wall St. He is an expert on corporate finance, the automotive industry, media companies and international finance. He has edited articles on national demographics, sports, personal income and travel.

His work has been quoted or mentioned in The New York Times, The Wall Street Journal, Los Angeles Times, The Washington Post, NBC News, Time, The New Yorker, HuffPost USA Today, Business Insider, Yahoo, AOL, MarketWatch, The Atlantic, Bloomberg, New York Post, Chicago Tribune, Forbes, The Guardian and many other major publications. McIntyre has been a guest on CNBC, the BBC and television and radio stations across the country.

A magna cum laude graduate of Harvard College, McIntyre also was president of The Harvard Advocate. Founded in 1866, the Advocate is the oldest college publication in the United States.

TheStreet.com, Comps.com and Edgar Online are some of the public companies for which McIntyre served on the board of directors. He was a Vicinity Corporation board member when the company was sold to Microsoft in 2002. He served on the audit committees of some of these companies.

McIntyre has been the CEO of FutureSource, a provider of trading terminals and news to commodities and futures traders. He was president of Switchboard, the online phone directory company. He served as chairman and CEO of On2 Technologies, the video compression company that provided video compression software for Adobe’s Flash. Google bought On2 in 2009.