Microsoft's Steve Ballmer may have to watch his backOctober 18, 2012: 5:00 PM ET
The opinions expressed in this commentary are solely those of Paul R. La Monica. Other than Time Warner, the parent of CNNMoney, and Abbott Laboratories, La Monica does not own positions in any individual stocks.
That's why some investors are growing increasingly impatient with the company's strategy and Microsoft (MSFT) CEO Steve Ballmer.
Microsoft's latest earnings came out after the closing bell Thursday. The company did not report blockbuster numbers. Sales were flat and earnings per share were down from a year ago -- although they did top estimates. But with Microsoft set to release its Windows 8 operating system and Surface tablet next week, there are hopes that Microsoft's new products can help rejuvenate its top and bottom lines.
Shares of Microsoft have had a nice pop this year -- they're up about 14% so far in 2012 -- but they still lag the performance of Google, Apple and the Nasdaq. What's more, Microsoft stock trades at the relatively cheap valuation of just 10 times next year's earnings estimates. That's a multiple more befitting a stodgy industrial stock than a tech leader.
Some Microsoft shareholders think that Ballmer, who took over as CEO from Bill Gates in 2000, is to blame. He needs to prove -- quickly -- that the company isn't on the road to permanent also-ran status.
"There is a Ballmer discount reflected in the stock price. The company has put a lot of money into things over the past dozen years that have not paid off so well yet," said Marian Kessler, co-manager of the Becker Value Equity fund in Portland, Ore. Her fund has a position in Microsoft.
Kessler thinks that if Microsoft were to replace Ballmer, the stock would immediately pop.
That may be a little unfair. For all of Microsoft's notable miscues over the past few years, including a big bet on online advertising through the purchase of aQuantive and a search partnership with Yahoo (YHOO) that has yet to cause Google execs sleepless nights, it's not as if Ballmer is presiding over a tech train wreck.
"I'm not sure it's a leadership issue. Microsoft is trying to go into new growth areas," said Sunil Reddy, a portfolio manager with Apex Capital Management, a Dayton, Ohio-based firm that owns the stock. "The issue is how technology is changing. The PC was the center of the universe ten years ago and now it's not."
Shareholders should also applaud Ballmer for getting Microsoft past most of its legal quagmires. With many of its antitrust problems behind it, Microsoft has finally stopped hoarding cash and started returning some of that money to investors through stock buybacks and a dividend that now yields an impressive 2.7%.
Along those lines, Reddy said investors have to adjust their expectations for Microsoft's stock. It's not the go-go growth stock it once was, and it never will be again. It's now a mature, stable blue chip.
Let's also get one thing clear: Barring some sort of scandal or a colossal product failure, Ballmer is not going away anytime soon.
In 2008, Ballmer suggested in a speech that he could retire in about 10 years. That's still six years away.
At the age of 56, Ballmer is relatively young, and he has not given any recent hints that he wants to bump up his retirement date. Microsoft has not made its succession plan public. The company declined to comment for this story.
Some tech experts speculate that Ballmer will eventually hand the reins over to Steven Sinofsky, the president of the Windows division. But if Windows 8 is more like Windows Vista than Windows XP, it's hard to imagine Sinofsky would be given the keys to the Microsoft car .... which means Microsoft would have to turn elsewhere if it decided Ballmer had to go.
On the flip side, if Windows 8 is a monstrous hit that does turnaround Microsoft, then Ballmer will clearly get a lot of the credit.
That's exactly what shareholders want to see.
"Microsoft has just been stuck in the mud. We hope that Windows 8 will provide a spark," said Gary Bradshaw, a portfolio manager with Hodges Capital Management in Dallas who owns the stock.
The early reviews for Windows 8 have been fairly favorable. If that translates to strong sales and a boost to Microsoft's earnings growth rate, you'll hear significantly fewer calls by shareholders for Ballmer's ouster. But make no mistake: Windows 8 has to be big. Investors may not give Ballmer enough time to convince them how awesome Windows 9 will be.
"I'm not sure I'm ready to say I want someone other than Ballmer just yet, " said Bradshaw. "But I do want the stock to move. We've given it lots of time and Ballmer has had plenty of chances."