Microsoft stock soars despite downturns in sales and profit

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Microsoft Corp., fresh from yesterday’s Windows 7 launch, this morning reported a 14% slip in sales and an 18% plunge in profit for its fiscal first quarter. Its shares immediately soared, briefly flitting to a 52-week high of $29.35 before ending the day up $1.43 to $28.02.

Is Wall Street out of its mind?

To understand why, it’s helpful to look at the unofficial currency of financial markets -- expectations. Analysts had forecast that the Redmond, Wash., technology giant would report per-share earnings of 32 cents. Microsoft instead earned 40 cents a share, better than investors had anticipated.

Expectations were also behind yesterday’s stock move. After Microsoft launched its most important product in three years, investors added just a penny to the company’s shares. That’s because the release of Windows 7 proceeded exactly as planned. Every aspect about Windows 7 had already been public knowledge, including its price, features and even consumer reviews.

So what did investors like so much about today’s earnings? Let’s take a closer look.

Net income for the quarter ended Sept. 30 was $3.6 billion, or 40 cents a share, down 18% from $4.4 billion, or 48 cents, a year earlier. Sales slipped 14% to $12.9 billion.

Many had expected the decline given the recession, which has all but paralyzed businesses that may be considering buying new computers. Instead, many organizations either made do with their old machines or opted for cheap netbook computers. Costing little more than $200 apiece, netbooks are so cheap they offer little or no profit for their manufacturers or for Microsoft, which sells the operating system software for these devices.

‘Microsoft, like the rest of the PC industry, is struggling with low average selling prices,’ said Richard Shim, analyst with research firm IDC.

Still, Microsoft was able to beat expectations by aggressively cutting costs. Operating expenses fell 8% from a year earlier to $8.4 billion.

Another reason for Wall Street’s counter-intuitive euphoria: It could have been worse.

The results, Technology Business Research analyst Allan Krans wrote in a note to investors, ‘though still weak, reflect stabilization of the economy and Microsoft’s revenue streams.’

*This post, which was written prior to the close of Nasdaq, has been updated to include Microsoft’s closing price.

-- Alex Pham

Follow my random thoughts on games, gear and technology on Twitter @AlexPham.