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Microsoft Over $30, But Will it Last with a Yahoo Overhang?

Microsoft Corp. (MSFT) is beginning to trade like the pre-Yahoo merger madness Microsoft of old. The stock has moved past $30 and has some room to run with the focus back on the software company’s latest quarterly results and earnings guidance. Though the third quarter was a bit mixed, revenue from desktop versions of Windows fell 24% to $4 billion against tough year ago comparisons and PC unit growth moderated with about 8% to 10% growth during the quarter, fiscal 2009 guidance was surprisingly strong. The company expects sales in the range of $66.9 billion to $68 billion and earnings between $2.13 and $2.19 a share verse the previous consensus estimate of revenues of $66.5 billion and net income per share of $2.10. With the stock trading at a value-like price of just 13.7 times forward estimates and paying a dividend yield of 1.5% while sporting a decent earnings growth of 14.3% on revenue growth of 11.7%, there’s no doubt the valuation supports some upside. But what clouds the picture is the thought and likely reality of Microsoft re-bidding for Yahoo. That seems to be inevitable given that Microsoft plans to grow its online search share from 10% to 30% within three to five years and the only way to really be able to do that and compete with Google is to purchase Yahoo. With Microsoft ruling out a proxy war, it seems that a deal would have to be reached through friendly means, meaning that Microsoft would have to sweeten its offer. It sounds a lot like Oracle and BEA Systems; Oracle offered $6.7 billion, BEA rejected, and then three months later, Oracle came in and raised its bid to $8.5 billion. With the weight of a Yahoo deal that will probably exceed $44 billion still on its shoulders, Microsoft shares are likely to be dead in the water for some time.

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