The drop weighed on broader indexes, including the Nasdaq <.IXIC>, which declined about 1 percent. Microsoft was the biggest percentage loser in the Dow Jones Industrial average <.DJI> and the No. 2 loser in the S&P 500 <.SPX>.
David Hilal, an analyst at FBR Capital Markets, downgraded the stock to market perform from outperform, citing sharp gains in Microsoft's stock price in recent months and concerns that technology spending may not bounce back this year.
Although we believe that demand is stabilizing for both Microsoft and IT spending in general, we do not expect an improvement over the balance of this year, he said in a note to clients.
In its fiscal fourth quarter ended in June, Microsoft's total sales fell 17 percent to $13.1 billion, some $1 billion smaller than analysts' average estimate. It was also the first-ever decline in annual sales of the Windows operating system.
Microsoft, the world's largest software maker, whose operating systems power the vast majority of personal computers, lost about $20 billion of its market value on Friday as its shares fell $2.31 to $23.25. The 9 percent drop was the biggest single-day fall for Microsoft since January.
Some analysts' took a more optimistic view of the results. While they acknowledged the quarter was rough for the Redmond, Washington-based company and lowered their 2010 fiscal year revenue and earnings forecasts, they saw a silver lining in the upcoming launch of the new Windows 7 operating system.
Jeffries & Co analyst Katherine Egbert said the company had dismal revenue and a somber June, but still raised her price target to $29 from $28 and repeated her buy rating.
Microsoft reported very weak revenue in all segments for June and an overall shift toward cost-conscious purchasing. But consumer PC and server sales flattened year-on-year, offering hope, she said.
Citigroup analyst Brent Thill said he was also disappointed by Microsoft's weak forecast for gross margins in fiscal 2010.
Still, in a client note titled Keep Your Eye On The Prize, he repeated his buy rating, citing the potential for improvements in 2010 when corporate demand is expected to rebound and Windows 7 may help profit margins.
At Thursday's close, Microsoft had risen 70 percent in the past four months on hopes that Windows 7 will be a hit once it is released on October 22, and a positive reaction to its new Bing search engine.
(Reporting by Franklin Paul; editing by Derek Caney and Andre Grenon)