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5 Reasons To Warm Up To Microsoft

The ‘mashing up’ of product categories (PC, laptop, ultrabook, tablet, smartphone) has created excitement and confusion in the marketplace. Not to mention an explosion of conspiracy theories: Will the tablet disrupt the PC? Will the ultrabook disrupt the tablet? Will 5 inch tablets disrupt smartphones? Will smartphones make PC’s a niche device? In such an ‘innovation cycle’, the color of money matters. New money made by ‘perceived innovators’ who bring new and shiny platforms counts for more than old money made the old fashioned way- via incumbent brands. All this means that Microsoft’s money machine faces headwinds every which way to Paduka… or does it?

Let’s take the stock breakdown from Trefis (figure below) as a starting point, and see how the piece parts stack up in terms of a future.

Windows : A billion license worst case. Windows sales have been dour as the economy has been so in the 2009-2011 time period. Windows 7 upgrades were not all they could be; so is Windows dead? Au contraire, as pointed out here. The laziness of Window 7 upgrades with an improving economy could mean a better than normal Windows 8 upgrade, even with any flattening or reduction of PC sales. Not a lot of people would call a billion license sale (see clip from article below) over 3 years a ‘sky is falling’ phenomenon.

Applications, Services, Office. We’ve all heard the new hysteria about ‘big data’ and the power of business analytics. If analytics make money, the arms merchants for analytics (e.g. database companies) will do very, very well. And a look at the Gartner numbers below from 2011 suggest that not only is Microsoft doing well here, its growth rate in the server space is amongst the best. So much so that in the latest quarter, Microsoft’s revenue rose when Windows sales fell.

Click to enlarge:

Xbox, Everywhere in the home that you could be. Apple TV (AAPL) and Siri have sucked some of the oxygen out of the Xbox home media story. But first consider (even discounting the source) the numbers here about 65% of Xbox users primarily accessing video content via their Xbox. Now consider the picture below of the number of places in your home the XBox reaches. And now consider that Xbox contributes to well under 3% of the stock price as it stands

Long Odds in the Tablet and Smartphone War? Microsoft has been justly criticized for being late to the smartphone and tablet wars. But I could argue that its entry point is ‘visionary by accident’. The market in smartphones is moving from high sex appeal (lead adopters, high price point) to high volume (mass market, lower price point). While sexy and Microsoft are hard to fathom in a single sentence, MSFT knows how to deal with volume. Further, the company has two disparate partners in Nokia (NOK) and Dell (DELL) who are exceptionally good at efficient supply chains and operational excellence, both of which are key to high volume, low profit markets. Volume may not be good for Dell as it commoditizes product and squeezes margins, but Bing and Acquantive (Microsoft Ads) could outperform if the eyeballs gather on Windows 8.

Analyst Upgrade Trajectory. Since Mobile World Congress late last month, Starmine rated best analysts for MSFT stock, Gregg Moskowitz and Walter Pritchard (Starmine rated analyst) reiterated an Outperform based on Office 365 and Windows 8 previews. And non-Starmine rated analysts Brad Reback (Oppenheimer) and Steven Hilreiterated raised their targets to the high $30’s.

All this said, ‘Mister Softee’ could soften ever so slightly as the market should sag in the next few weeks. A buy price of $30 should make you a happy camper in 12 months as U.S. markets gain favor among international investors. In my estimation (at a year end price of $37), MSFT will outperform the SP quite nicely due to sector, product and geo-political issues as technology becomes (ironically) a safe haven from the upcoming gyrations in commodities, and possibly housing.

Disclosure: I am long MSFT.

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