The technology world was abuzz on Friday, Aug. 23, when it was revealed that Microsoft Corporation (NASDAQ:MSFT) CEO Steve Ballmer would be leaving the company within the next 12 months.
Shares of the software giant immediately spiked on the news, rising as much as 7% on the day of the announcement. Ballmer has repeatedly served as a whipping boy for financial pundits, who blame him for Microsoft Corporation (NASDAQ:MSFT)'s sluggish performance over his 13-year tenure.
Is Ballmer really to blame for Microsoft's supposed "lost decade"? Or are investors misguided for blaming Ballmer for poor returns?
A "lost decade" in name only
Financial pundits and those in the financial media love to refer to Microsoft Corporation (NASDAQ:MSFT)'s share-price performance over the 13 years of Ballmer's tenure as a "lost decade." To them, Ballmer led Microsoft during a period of extremely lackluster performance, failing to live up to the standards of former CEO Bill Gates.
It's true that Microsoft Corporation (NASDAQ:MSFT)'s stock has performed poorly since Ballmer took the reins of the software juggernaut. In 2000, the stock reached almost $60 per share. After the tech bubble burst, the stock fell to less than $30 and has traded between $30 per share and $40 per share since. The fundamentals, meanwhile, paint a vastly different picture.
In fiscal 2001, Microsoft Corporation (NASDAQ:MSFT) booked diluted earnings per share of $1.32 on revenues of $25 billion. In its most recent fiscal year, Microsoft racked up diluted EPS of $2.62 and $73 billion in revenue.
The fact is, under Ballmer, Microsoft nearly tripled its revenue, and considering this was already a huge company generating $25 billion in revenue before he took over, this is no small feat.
But, in the investing world, there's always someone to blame. So, in the case of Microsoft, who is the real culprit?
Why Ballmer is not to blame
The reason why investors didn't do well under Ballmer's leadership is simply this: they paid far too high a price for Microsoft shares. Investors buying at $60 per share back in 2000 paid 45 times earnings for Microsoft Corporation (NASDAQ:MSFT), which even 13 years ago, was a very large, mature company.
Put simply, any investor who pays 45 times trailing earnings for a large-cap stock is asking for trouble. The truth is, any CEO, Ballmer or otherwise, would be set up to fail from a stock-price perspective under those conditions. A company would have to grow at an extremely rapid pace to justify that kind of a valuation, but as companies get larger, their growth trajectories inevitably slow.