Shares in Microsoft Corp. slid more than 11 percent Friday, their biggest drop in more than five years, after the software giant said earnings would be hurt by increased investments aimed at fending off rivals such as Google Inc.
The stock had its biggest single-day decline since November 2000, lopping about $32 billion off its $281 billion market capitalization and reducing the value of Chairman Bill Gates’s stake by about $3 billion.
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The move shocked Wall Street, which had hoped to benefit from the company’s biggest product releases in years, with its Vista operating system and Office 2007 scheduled for January.
Now Microsoft appears to be using that potential revenue to bankroll longer term strategies, prompting investors to question when it will deliver on growth expectations.
“This is still a company that is extremely profitable. What people are worried about is whether that ever flows through ... to the benefit of shareholders, or does the company spend that money,” said Charles Di Bona, an analyst at Sanford C. Bernstein.
Microsoft will spend about $2 billion more in fiscal 2007 than expected, wrote Goldman Sachs analyst Rick Sherlund in a note to investors.
While earnings will still rise during the year, it leaves investors “unresolved on what the benefits might be of this radical acceleration,” he said.
“This is a big disappointment in the short term,” said Todd Lowenstein, a co-portfolio manager at HighMark Capital Management, where Microsoft shares comprise about 1.5 percent of a $500 million fund. “A lot of investors may have lost some patience, especially with the increased spending.”
Microsoft said Thursday it would increase spending on its software services business. Chief Financial Officer Chris Liddell said the company was willing to make a trade-off between “the set of opportunities and the revenue growth potential we see.”
The company forecast earnings per share of $1.36 to $1.41 for the 2007 fiscal year starting July 1, below analysts’ forecast of $1.53 per share, according to Reuters Estimates.
“If Microsoft can’t get operating leverage when it’s in its biggest product cycle ever (and customer interest is high), when can the company show leverage?” wrote Morgan Stanley analyst Mary Meeker.
Morgan Stanley and Lehman Brothers both cut Microsoft to an ”equal weight” rating from “overweight.” UBS, Credit Suisse and Banc of America Securities pared their price targets.
Investors treat Microsoft as more of a traditional story than a fast-growing Web stock, valuing it at 18 times expected fiscal 2007 earnings, compared with 34 for Google Inc.
After decades of selling software out of a box to run on PC desktops, Microsoft aims to deliver more software over the Internet, supported by advertising or subscriptions.
It appears to be preparing an online platform of hosted services to better compete with Web search leader Google or the community features provided by Yahoo Inc., analysts said Friday.
Di Bona estimated that one-quarter of the additional spending would focus on pushing its Xbox 360 video game consoles ahead of a new PlayStation release by rival Sony Corp. , while the remainder would fund Web-based services.
Microsoft did not detail its spending plans. Liddell said the company would invest in rapidly growing areas of the software market, such as collaboration, business intelligence, performance computing and security.
“We have decided to accelerate investment in certain areas so we started that in the third quarter, but we will be more active in the fourth quarter and going into next year,” Liddell said in an interview Thursday.
Microsoft shares closed down 11.38 percent, or $3.10, at $24.15 on Friday.