Microsoft (MSFT) shares have been clobbered today after the company’s report last night of modestly disappointing results for its fiscal fourth quarter ended June. The quarter was something of a mixed bag: the Windows shortfall that the company suffered in the March quarter was reversed, as the Client group reported better-than-expected results. But there was a big topline miss for the online services group, as the company suffered from a softening online advertising market.

The company also announced plans to ratchet up spending to bulk up its online segment, and gave some new detail on its rejected proposal to buy Yahoo’s search business. The overall effect was to put a huge spotlight on a business that generates just a small fraction of overall revenues. For investors in Microsoft, in short, the story is now all about what happens to their online business.

Let me demonstrate. Here are some excerpts from today’s batch of Street research on the company:

• John DiFucci, J.P. Morgan: “There continues to be a meaningful amount of uncertainty regarding the spending required in the online services business, and MSFT’s topline is not immune to a macro slowdown.”
• Brent Thill, Citigroup: He writes that the stock is now being driven by FUD. “Fear that MSFT may not be the product-cycle led margin expansion story many anticipated, Uncertainty about whether a Yahoo deal will happen and Doubt that its online investments will pay off.” He says all of those are valid issues, but that the stock at the current level is “compelling.”
• Brendan Barnicle, Pacific Crest: He writes that the company appears to be ready to go it alone in the online business. “Microsoft is preparing to spend several hundred million dollars on developing its online business capabilities. Given the size of the online advertising market, Microsoft is not willing to forgo the opportunity, despite the challenges.”
• Jin Yin, Standard & Poor’s: Yin cut his rating on the stock to Buy from Strong Buy, and lowered his price target to $37 from $43. “Though MSFT plans to increase headcount in its online services group, we see growth in that business declining, reflecting a touch ecnomy and market-share loss,” he writes.
• Sid Parakh, McAdams Wright Ragan: “While core businesses continue to grow well, the significant miss in Online revenus and increased spending in the business, a business where our confidence is fading, is concerning.” Parakh thinks the company’s online revenue guidance for FY ‘09 is too high. He maintains a Buy rating, but cut his target to $35 from $40.
• Kevin Buttigieg, Stanford Group: He thinks online was not the only place where macro slowing was an issue. “Online weakness was a result of a slowdown in online advertising, while Office 2007 sales to consumers was slow and we think Xbox 360 software attach rates suffered as well.”
• Charles DiBona, Bernstein Research: DiBona notes that the company “conspicuously failed to address investor concerns” about the online business, despite the planned bump up in spending. He writes that it is now “incumbent on management to give a clear, detailed and convincing explanation of the direction of, expected returns on and investment decisions behind those [online] investments” at next Thursday’s meeting with analysts in Redmond.

MSFT today is down $1.90, or 6.9%, to $25.62.

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Eric Savitz

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