Scoble explains Why Wall Street didn't believe Steve Ballmer

Robert Scoble wrote a story today "Why Wall Street didn't believe Steve Ballmer". Robert believes Ballmer should communicate with the masses at conferences and other venues to explain the Microsoft story. Then the masses would influence, or validate, the analyst community. I agree communication was the problem, but not that the masses was the place to start.

I wrote a blog about this a few weeks ago. Here is an excerpt;

Microsoft management did a poor job of communicating to Wall Street, during the April 06 earnings conference call, that next year we plan to spend about $2 Billion more than analysts expected. The stock price dropped more than 20% wiping out $55 Billion in market value. Microsoft management was incredulous. How could Wall Street react in such an immature way? How could a couple billion in additional spending wipe out $55B of market value? It is all about communication...and how you clean up your messes.

Microsoft should have communicated a clear plan, ahead of the earnings call, for how we planned to "invest" the money in new business opportunities, and the expected time frame to see results. Instead, it was suggested to analysts during the conference call that they should add $1.5B to $2B to their spending estimates for next year. It was only later, after the severe stock market reaction, that Microsoft "scrubbed the numbers" and clarified that it would be more like $1B, and gave clearer guidance on where the money would be invested. Too late. The market has already decided that given all the delays with "Longhorn/Vista" that the payoff for this $1B investment could be much longer than expected.

How could $1B in investment cause a $55B reaction? It is actually a rational response. The initial claim was additional spending of $1.5B to $2B. Wall Street applies a P/E multiple to earnings. Well it works both ways, that P/E also gets applied to spending which results in lower earnings. The P/E was around 21 at the time, so 21 times $2B is $42B of market value. The remaining $13B of lost market value is probably over reaction that may disappear over time.

If you would like to read the full original post you can find it here.

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Comments

[Jason Wood]

Don,

Great job; somehow I missed this story ths initial go around (either I'm to blame Bloglines or more likely, the self induced state of catatonia I was under after the MSFT quarterly results) :)

Thanks for commenting on my blog post, as well.

Jason