THE MICROSOFT INVESTOR: Wall Street Expecting Strong Quarter On Thursday

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Photo: Associated Press

MSFT shares up in anticipation of strong quarter. Following reports of strong industry PC sales last week, the MSFT shares are up about $0.30 to $30.95 this morning as investors expect a strong quarter on Thursday.  Investors will be looking for information on Windows 7 and Office 2010, which still drive the company.  Over the long haul, we think Microsoft is in a challenging spot, as the world moves away from PC-based computing toward cloud and mobile computing.  MSFT currently trades at 13x Enterprise Value / Trailing Twelve Months Free Cash Flow.UBS Expects Microsoft To Beat The Street On Thursday And Stock To Rise (UBS)
Microsoft reports Fiscal Q3 earnings this Thursday and UBS analyst Brent Thill is looking for upside.  Thill expects the company to report $14.6 Billion in revenue and $0.44 in EPS, which is $300 million and $0.02 ahead of consensus, respectively.  Despite all the recent upgrades following strong industry data, Thill believes all the good news has not fully been priced into the stock.  In addition, Thill is looking for strong results from “incremental improvements in premium mix and Server strength.”  As a result, he reiterates his $36 price target (about 16% upside) and Buy rating.         

More PC Estimate Increases On Wall Street; But It’s Not All Good News For Microsoft (Barclays)
PC sales have gotten off to a stronger-than-expected start this year, and Barclays analyst Ben Reitzes just raised his estimates for 2010.  Reitzes thinks PC sales will now grow 21% in 2010 versus his previous estimate of 16%.  Consensus is largely around 21% so Reitzes is a little late to the game.  However, he points out that despite the near-term strength, companies like Microsoft that make their money selling to corporate enterprises are still in a difficult spot long-term: “Despite a near-term uptick in corporate sales, we continue to believe that the PC market is increasingly becoming a consumer electronics category given the rapid shift toward ultra-mobile notebooks (shorter useful lives, more like handsets). As a result, we believe that consumer sales will outpace expectations over the long-term, while corporate could disappoint given its higher mix of desktops.”  On the other hand, this is good news for Apple. 

Desktop Virtualization Is Hot Hot Hot (Jefferies)
Jefferies analyst Katherine Egbert surveyed 25 resellers of virtualization software to determine that demand for the product has increased in the past quarter.  Desktop virtualization software enables users to access their desktops remotely through a central company server.  Specifically, Egbert found that 44% of respondents saw high customer interest in desktop virtualization products versus 40% the previous quarter.  On average the resellers surveyed expect virtualization to grow 13% this year.  There is a lot of competition in this space (VMWare and Citrix are the leaders).  However, this is also good news for Microsoft’s Hyper V virtualization offering, which is currently in third, but gaining traction.     

More Bad News About Microsoft labour Conditions In China (Associated Press)
The National labour Committee (a non-profit group) says suppliers in China violated child labour laws by forcing underage workers to work long shifts without access to bathrooms.  Most of these workers were unregistered.  This news isn’t likely to impact the stock. 

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