Microsoft Corp. (NASDAQ: MSFT) was the beneficiary late last week on news that Steve Ballmer has decided to retire. The news drove shares up roughly 7% to $34.75 on massive trading volume, and shares are currently giving back some of the great gains on Monday. The news is a positive in the sense that investors will no longer have Ballmer to blame for a lack of new catalysts and sitting on the laurels of the past. The problem is that in the post-Bill Gates, and now post-Ballmer, era, Microsoft will be evaluated just like any other technology stock. Microsoft may also have the problem that there is no other known “next Steve Jobs” candidates, and it is possible that an internal candidate may have to rise to the occasion.
Over the weekend came reports from Barron’s that Wall Street is cheering Ballmer’s exit. Then Barron’s wrote on Monday questioning whether Microsoft has become a graveyard for new ideas. 24/7 Wall St. has even gone as far as to try to see which other CEOs from outside may be solid candidates to take over as Microsoft CEO.
So, back to how the valuation will start to take place. Bill Gates and Steve Ballmer are no ordinary men, even if the Microsoft stock performance over the past decade has been less than ordinary. These two men did help drive Microsoft to still be one of the most powerful corporations in the world. The growth and expansion of Microsoft has created billions in wealth, including the world’s richest man. Without the co-founders, Microsoft likely will be evaluated no differently than any other technology stocks.
First and foremost, any new CEO will have to evaluate the very recent Ballmer reorganization that left many outsiders scratching their heads. The company’s next fiscal year-end is June of 2014, and the $2.75 consensus in earnings per share from Thomson Reuters gives Microsoft a valuation of 12.4 times expected earnings. That is not expensive for the stock market by any means, but there are many technology giants trading at cheap valuations.
A new CEO has to evaluate Microsoft devices such as the tablets and smartphones, as well as the Xbox One. The company is ripe for a breakup, even if that is truly a risky strategy. Until we have a new CEO announcement, Microsoft’s valuation is likely going to garner no premium and may even trade at a discount compared to other technology giants.