Chart of the Day $MSFT: Now Hiring

by Dan December 18, 2013 11:19 am • Commentary

Since making new multi-year highs earlier this month, MSFT is now down about 7%, with last night representing its first close below its all important 50 day moving average (purple line below) for the first time since late September.  The stock is also sitting right on near term support at $36 (red line), which was healthy resistance in the Summer and prior to the recent breakout to new highs last month.

MSFT ytd chart from Bloomberg
MSFT ytd chart from Bloomberg

The next real meaningful support level is just below the earnings gap back in late October at the $33.50/$34 level that also corresponds with the stock’s 200 day moving average (yellow line).

The stock’s recent volatility has lot to do with the twists and turns in the company’s search for a successor to outgoing CEO Steve Ballmer.  Press reports and certain analysts who are “in the know” have placed Ford CEO Alan Mulally as the front runner, but this morning’s news of Ford’s reduction of 2014 guidance could make the decision harder, not from MSFT’s point of view, more from the standpoint that Mulally has widely been credited for the miraculous turnaround of Ford after the financial crisis and I am not sure he would want his legacy to be that he went out on a down note.

Also contributing to the weakness, last week, another favored candidate, Steve Mollenkopf from QCOM, was given the top job there in an effort not to lose him.  So the candidate pool dwindles and investors appear to be speaking with their wallets that they do not like the prospects of an internal candidate to replace Ballmer.

Just this morning, Rick Sherlund, Nomura’s software analyst who brought MSFT public when he was at Goldman Sachs in the mid 1980s, has been in the camp that Mullaly would  get the job, but has since changed his tune a bit in a note to clients this morning:

Microsoft Director John Thompson (lead independent director and head of the CEO search committee) released an update yesterday in a blog post noting that the board would not likely decide on a new CEO until early next year.

We have been of the view that Ford CEO Alan Mulally has been interested in the Microsoft CEO position (supported by his nondenial denials) and likely to take the position. It does not appear he has been offered the job based on press reports that the board has approached several “dark horse” candidates over the past few weeks, raising the question whether there may be some change in consensus thinking at the board level.

If the board of Ford is pressing Mr. Mulally for a definitive answer, as we have seen reported in the press last week, we have to question whether he might need to pull his hat out of the ring at some point soon and say with certainty that he is not interested. This would be negative for the stock, in our view, at least over some interim period until we have more clarity on who else might be on the
potential list of “dark horse” candidates.

In sum, investors are less enthusiastic about the emerging crop of potential replacements for the current very unpopular CEO, as evidenced by the recent price action.  Aside from obvious fundamental challenges given the secular headwinds in almost every major business line, the uncertainty surrounding future leadership is likely to continue to weigh on the stock as the company was already underway with a restructuring and the future integration of NOK’s handset business.  We continue to dislike the story and think the stock is a very attractive short back near the previous highs as few of the existing candidates look that attractive.