Microsoft Corporation

In the spring of 1999, Marta Fontanez, a new analyst with Capital Appreciation, needed to make a recommendation to the investment council concerning the value of Microsoft’s stock. She was concerned with announcements made by the company between 1997 and 1999. In the quarter ended June 30, 1997, Microsoft announced that it did not buy back any shares because its stock ‘price was a little too high.’ Not only did Microsoft’s stock price fall on the news, but the Dow Jones swooned 130 points! In subsequent corporate releases, Steve Ballmer repeatedly cautioned investors of the risks inherent in Microsoft stock and the possibility that the security was overvalued in 1998 and 1999. Microsoft was publicly talking down its stock, purchasing fewer shares in the open market than before, and experiencing heavy levels of insider selling. Marta was also concerned with the value of the firm given the effects of options issuance and wondered if the market was not accurately calculating their costs. She needed to determine whether these actions reflected Microsoft insiders’ superior information as to the value of the firm and, thus, there would be an eventual correction in the stock price or if the stock price would continue to climb. Marta wondered whether Steve Ballmer was correct that Microsoft had become simply too expensive to buy. Was Microsoft finally at a loss as to how to invest its profits? Or, was the stock a good buy?