Dear Mr. Berko:

I’m thinking about buying 300 shares of Microsoft as an undervalued growth stock. The stock hasn’t done anything since January 2000, and with $40 billion of sales on the company’s books for this year plus a low price-earnings ratio of 19, it looks like it is underpriced. Please give me your thoughts on this stock as an investment for one or two years.

M.T., Elkhart, Ind.

Dear M.T.:

I think it’s a fair assumption to say that most folks in the civilized world have heard of Microsoft Corp. (MSFT-$23.99) as well as of Bill Gates. It’s also fair to say that almost every growth fund owns shares of MSFT in its portfolios because most of the suits on the Street are running around telling investors that MSFT is a wonderful growth stock.

There are 31 suits from A.G. Edwards to UBS Warburg who follow MSFT, and 29 have a “buy” rating on MSFT, including Standard & Poor’s with its five-star rating. Well, I’m sorry to spoil the party, but from my catbird seat, this stock is even less exciting than a Japanese kabuki dance.

MSFT has nearly 11 billion shares outstanding, a market capitalization of $295 billion and $40 billion in revenues from software products. It also sells a contraption called Xbox, a silly gaming device highlighting near-naked women and men dressed as space cowboys showing your kids how to pillage, plunder, maim and other acceptable bloody, violent acts. Revenues are increasing at a slower pace; earnings were 99 cents per share in 2000 and limped to $1.15 last year.

Linux, an open-source software system, is taking the steam out of MSFT’s sales because it’s free to anyone who wants to download it. “Free” certainly beats the list price of $400 for Microsoft Office or Windows, a cost that most of the world can’t afford. Firefox, a new Web browser that runs on Linux and Windows, is becoming the browser of choice for personal computer users who are quite rightly concerned about the security of Microsoft Internet Explorer, a target of choice for spyware programs and viruses.

MSFT’s new operating system, code-named Longhorn, which has been on the drawing board for five years (problems after problems and more problems), was supposed to debut in 2004, then 2005. Microsoft has cut back on many of the system’s key features in order to meet the new 2006 target date.

MSFT is certainly the most profitable company in the $1.3 trillion tech industry and mints money at the rate of $1.1 billion a month in free cash flow. This from a company that used to be powerful and intimidating, but is a now a tired, slow engine that needs new rings and pistons, a tankful of high-test fuel and a spark to ignite it. The company has lost its dynamism and is crippled by an onerous, suffocating bureaucracy.

MSFT six years ago could be compared to the General Motors of the 1950s and 1960s. Now it can be compared to the General Motors of today. MSFT does have a sweet balance sheet that gets Zagat’s highest rating of 30. And the company’s income statement is almost as good. Operating margins, which crashed to 40 percent last year from 56 percent in 1999, are still awesome. And net profit margins, which were patently sublime and have been falling like dead ticks from tall giraffes, are still mighty impressive at 30 percent.

However, revenue growth has begun slowing to a trickle. A Wall Street technology analyst told me that MSFT’s revenues won’t grow by more than 2 percent a year for the foreseeable future. Those facts do not augur well for a company that many on the Street would call a growth stock.

The consensus of the Street puts the company’s earnings this year at $1.26 and next year at $1.28; flat as a flapjack and certainly not growth stock stuff. Those earnings translate to a P/E of 19; certainly not a number one would ascribe to a growth stock — a value stock, perhaps, but not a growth stock. MSFT is a grand, mature, over-the-hill software company.

It’s the nature of computer software to run out of steam quite quickly. Successes depend a constant stream of new ideas and new ideas don’t require large capital investments. There are a lot of people out there with superb ideas who can eyeball with the best at Microsoft. And they’re doing it! So at best, I think MSFT could push $30 and I wouldn’t own the stock.

Please address your financial questions to Malcolm Berko, P.O. Box 1416, Boca Raton, Fla. 33429 or e-mail him at malber@adelphia.net.