Updated: October 13, 2011 12:28AM
Dear Mr. Berko: I know you haven’t cared for Microsoft in the last 10 years, in spite of its good record of revenue and earnings growth. Now that it bought Skype, the free phone and video service telecommunications company, do you have a new opinion on the stock? My broker, who is with a very prestigious firm, thinks this Skype acquisition will turn the corner and eventually push Microsoft up to the $50s again. So I bought 1,000 shares. Tell me what you think. — B.R., Kankakee
Dear B.R.: It’s best to ask for advice before the horse escapes from the barn. Anyhow — sell the stock.
The prestigious firms who gave us those wonderful mortgage-backed securities tell us that an IPO of Groupon, with $785 million in revenues, is worth $25 billion. Facebook, with $2 billion in revenues, according to Goldman Sachs, is worth $90 billion. Goldman Sachs also believes that Twitter, with estimated 2011 revenues of $10 million, is worth $11 billion. BodiART, a Hollywood tattoo franchisor that caters to the stars, with $43 million in revenues is reputed to be worth $9.1 billion in an IPO.
And Microsoft is paying $8.5 billion for Skype, which has $760 million in revenues, plus a successful string of losses. How in the name of the laughing Buddha can an honest analyst (is that an oxymoron?) from a prestigious firm suggest Facebook is worth more than ConocoPhillips (COP-$71), or that Groupon is worth more than Kellogg (K-$54) or Twitter is worth more than Delta Airlines (DAL-$9), then in the next breath tell you that Microsoft will double its share price?
Microsoft’s (MSFT-$25) CEO, Steve “Bullet Head” Ballmer, got caught in the Skype hype and saved this profitless company from the ignominy of a piddling $1.5 billion public offering. Bill Gates doubts MSFT will earn a dime’s return from Skype and got his dander up when Ballmer told him about the deal. Because the $8.5 billion was cash molding overseas collecting nothing, the purchase will not be dilutive to MSFT’s earnings.
But Skype will certainly be dilutive to MSFT’s management. Skype has proven itself to be a lousy business product. Try as it may, Skype can’t connect with the business community. The quality of its service is unreliable, while its connections are scratchy and patchy.
Skype has a huge (665 million) user base, a well-known but poorly esteemed name and a terrible business model. This means that MSFT management will be spending enormous resources and man hours to improve (if it can) Skype’s technology and put a spit shine on its image.
Ballmer hopes that a MSFT/Skype alter ego will increase advertising revenues to its user base. But he needs to consult a new astrologer. Bullet Head fails to recognize that the number of websites competing for advertising dollars is growing much faster than the advertising dollars. Bullet Head may also discover that he will be rowing a leaky boat upstream with a cracked oar and spending too much time bailing water. This Skype acquisition isn’t worth a tinker’s dam, and certainly, it is not reason enough for you to buy MSFT.
Many believe MSFT paid billions more than Skype is worth, which reflects poorly on Bullet Head’s judgment as a CEO. Though MSFT continues to dominate its traditional markets, it has had little success in faster-growing areas that enjoy investor enthusiasm. And despite MSFT’s good record of revenue and earnings growth, during the last decade, the share price has, for most intents and purposes, traded between $22 and $31 per share. You may have made a mistake following the advice of a prestigious brokerage.
Address your financial questions to Malcolm Berko, P.O. Box 8303, Largo, FL 33775 or email him at firstname.lastname@example.org.