David Einhorn, founder and president of Greenlight Capital, is quitting Microsoft (MSFT) stock.
Any investor still in this dog of a tech company should follow his lead.
Einhorn’s negativity comes because of a “flop” with Windows 8, continued trouble with the Surface tablet and the fact that a “decade of mismanagement has put Microsoft at risk of becoming a shrinking company.”
Amid stiff competition from the Apple (AAPL) iPad, Google (GOOG) Nexus and Amazon (AMZN) Kindle, Microsoft had to write off $900 million in bloated Surface RT inventory last quarter — a sure sign the company overextended itself and naively expected widespread adoption of the device.
Einhorn said Greenlight received an “annualized high single-digit return” from its MSFT investment. Greenlight Capital first invested in Microsoft stock in 2006, so Einhorn is at least booking a profit thanks to modest share appreciation and dividends; MSFT is up about 7% from its highest point in 2006, so even a badly timed buy puts him in the green.
“In 2006 we compared Microsoft to A-Rod, which was a compliment at the time,” Einhorn wrote, of course talking about Yankees slugger Alex Rodriguez who is now mired in injuries and a scandal around performance-enhancing drug use. “In 2013, the comparison is still apt, but it is no longer a compliment.”
There are those who still believe in Microsoft stock as a long-term investment, and there’s decent reasons for their views. There’s the 2.9% dividend, a robust buyback plan, operating cash flow around $30 billion and almost $77 billion in cash and short-term investments. And regarding the tape so far, this has been a very good year for Microsoft investors with a roughly 20% return year-to-date even after recent trouble, keeping it ahead of the S&P 500 despite the dip.
Also, even after the rally, Microsoft has a similarly cheap forward price-to-earnings ratio of around 10.5 — and when you back out its impressive cash, you get a forward P/E of about 7.2. Sounds like a bargain, right?
But Microsoft continues to struggle mightily in the mobile space — not just with Surface, but with its Windows Phone OS. Smartphones including the Nokia (NOK) Lumia that run the Windows Phone OS capture a measly 3% of the market, according to data from ComScore.
Yes, Windows remains dominant and Microsoft’s Office software is a staple of businesses around the world. But Microsoft investors might be facing another dead-money scenario for the next decade as Windows, Office and the PC generally consider a slow slide into obsolescence.
That’s clearly not where you want to be — especially as the stock market continues to push to new heights and embarrass laggards like MSFT.
Einhorn has made his share of great calls, like a bearish bet against JCPenney (JCP) in 2012, and his share of bonehead ones, like a short against nutrition and diet supplement company Herbalife (HLF) this year. There’s no telling just yet how this MSFT call will play out.
Yes, David Einhorn has underperformed markedly in 2013 in large part because of the Herbalife call. But it’s not for nothing that he’s running a multibillion-dollar hedge fund — so let’s at least pay attention to his moves, shall we?
- Even CEO Steve Ballmer is hinting that Surface is a flop. (BGR)
- Why Microsoft stock is not a bargain. (The Slant)
- How Surface “kneecapped” MSFT earnings. (InvestorPlace)
Jeff Reeves is the editor of InvestorPlace.com and the author of “The Frugal Investor’s Guide to Finding Great Stocks.” Write him at email@example.com or follow him on Twitter via @JeffReevesIP. As of this writing, he did not own a position in any of the stocks named here.