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As Steve Ballmer Exits Microsoft, Should Investors Really Rejoice?

Thursday - 8/29/2013, 8:18am  ET

The technology world was abuzz on Friday, Aug. 23, when it was revealed that Microsoft CEO Steve Ballmer would be leaving the company within the next 12 months.

Shares of the software giant immediately spiked on the news, rising as much as 7% on the day of the announcement. Ballmer has repeatedly served as a whipping boy for financial pundits, who blame him for Microsoft's sluggish performance over his 13-year tenure.

Is Ballmer really to blame for Microsoft's supposed "lost decade"? Or are investors misguided for blaming Ballmer for poor returns?

A "lost decade" in name only

Financial pundits and those in the financial media love to refer to Microsoft's share-price performance over the 13 years of Ballmer's tenure as a "lost decade." To them, Ballmer led Microsoft during a period of extremely lackluster performance, failing to live up to the standards of former CEO Bill Gates.

It's true that Microsoft's stock has performed poorly since Ballmer took the reins of the software juggernaut. In 2000, the stock reached almost $60 per share. After the tech bubble burst, the stock fell to less than $30 and has traded between $30 per share and $40 per share since. The fundamentals, meanwhile, paint a vastly different picture.

In fiscal 2001, Microsoft booked diluted earnings per share of $1.32 on revenues of $25 billion. In its most recent fiscal year, Microsoft racked up diluted EPS of $2.62 and $73 billion in revenue.

The fact is, under Ballmer, Microsoft nearly tripled its revenue, and considering this was already a huge company generating $25 billion in revenue before he took over, this is no small feat.

But, in the investing world, there's always someone to blame. So, in the case of Microsoft, who is the real culprit?

Why Ballmer is not to blame

The reason why investors didn't do well under Ballmer's leadership is simply this: they paid far too high a price for Microsoft shares. Investors buying at $60 per share back in 2000 paid 45 times earnings for Microsoft, which even 13 years ago, was a very large, mature company.

Put simply, any investor who pays 45 times trailing earnings for a large-cap stock is asking for trouble. The truth is, any CEO, Ballmer or otherwise, would be set up to fail from a stock-price perspective under those conditions. A company would have to grow at an extremely rapid pace to justify that kind of a valuation, but as companies get larger, their growth trajectories inevitably slow.

The same complaints against Microsoft during its supposed lost decade can easily be made about many other technology stocks. The technology bubble was not a consequence of underlying businesses failing to perform at a satisfactory level; rather, it was a consequence of mass investor delusion.

Consider the case of fellow tech stock Intel . The stock traded north of $73 per share in the fall of 2000 before falling to the low $20s -- exactly where it stands today. Even using Intel's most profitable year between 1991 and 2003, investors were paying more than 48 times those earnings at a price of $73 per share.

Meanwhile, Intel's underlying business, like Microsoft's, was quite successful during this time. Intel generated $26 billion in revenue in 2001. Last year, Intel did more than $53 billion in revenue. That's more than double the level generated before the tech bubble burst.

As a result, it's plain to see that it wasn't Ballmer, or Intel's own CEO, that were at fault for the post-tech bubble malaise. The fault lies solely with investors who turned a blind eye to valuation and bought mature companies for multiples far beyond reasonable levels.

A better decade to come

Investors who buy either Microsoft or Intel today are putting themselves in much better positions than those who bought in 2000.

Valuations are much more reasonable, and these two technology stocks now pay billions in dividends to their shareholders.

For investors, buying Microsoft today at 13 times earnings with a 3% dividend, and Intel at 12 times earnings and a 4% dividend, is a much better risk-reward proposition than paying 40 times earnings with no yield.

My perspective is that it's likely that Microsoft's next CEO will be unfairly credited with steering the company through a prosperous decade for the stock, just as Steve Ballmer was unfairly blamed for Microsoft's languishing share price during his term.

Technology stocks such as Microsoft and Intel are not the speculative bets they were during the days of the tech bubble. Rather, they are massively profitable businesses that handsomely reward shareholders and trade for reasonable valuations. As a result, new investors will very likely have a richly rewarding decade ahead of them.

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