THE MICROSOFT INVESTOR: Strong PC Growth Forecasts Help Stock Hold Gains

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MSFT shares up again on encouraging industry data. Yesterday IDC and Gartner followed Intel’s strong quarter with their own bullish forecasts for 2010 PC growth.  Upcoming potential catalysts include March quarter results (Windows 7).  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.

BoA/Merrill Lynch Takes Another Look At Miscrosoft; Likes What It Sees (Merrill Lynch)
MSFT has lagged the NASDAQ by about 9% this year.  Morgan Stanley analyst Kash Rangan took a deep-dive into Microsoft and believes the shares are cheap.  Specifically, Rangan believes “the strength of the product portfolio coupled with improving economy supports the long term growth beyond just FY11.  We’d be more concerned if innovation was stalling, but we’re seeing the contrary.  The list of important recent innovations and upcoming ones is impressive: Win 7, Azure, Windows Phone, and Bing.  Office 2010 could be the next cycle.  Google is attacking key franchises: OS (Chrome OS) and Office (Google Apps) but MSFT is geared up to respond.

Merrill Isn’t The Only Microsoft Bull: Wall Street Is Expecting A Strong Quarter
Microsoft reports earnings on Thursday April 22nd and the Street is optimistic.

  • Morgan Stanley analyst Adam Holt: “Strong PC/Server data and solid execution suggests MSFT should report Q3 that is either in line/slightly ahead of us at $14.6B/$0.42 and the Street at $14.4B/$0.41. While the PC data is largely in line, Client [Windows] could see modest upside vs. our ests. and we see opportunities for outperformance in Server & Tools and OSD as well. Expectations heading in to Q3 are lower than Q2 and in-line results are probably good enough, while a slight beat would be viewed favourably.”
  • Barclays analyst Israel Hernandez: “We remain comfortable with our 3QFY10 Microsoft forecast for $14.605 billion and $0.44 (consensus: $14.4 billion/$0.42), with a positive upside bias on the strength in the PC market…we expect that Windows and Server upside (from better server shipments) is likely to offset the majority of this deferral. Off the strong PC outlook, we expect sentiment on Microsoft shares to continue to improve into the Windows 7 enterprise cycle and expect shares to trend higher near-term towards our $35 price target which represents a P/E of 17x our C10 EPS estimate of $2.10.”

Facebook Stealing More Share Of Brand Advertising — At Expense Of Yahoo, AOL, And Even Google (TBI Research)
According to advertisers, Facebook is taking an increasing share of ad dollars from big brands at the expense of big portals like MSN.  Specifically: “100% Reach Blocks on Facebook (homepage takeovers) now cost almost as much as a basic homepage takeover on Yahoo and MSN.”  In addition, “Brand advertisers are also starting to move more of their search budgets to Facebook self-serve this year.”  Online is only about 4% of Microsoft’s overall revenue so this won’t break the stock, but if the company wants to make this division profitable (it is unprofitable), this surely isn’t going to help.

Intel CEO: Strength in Chips May Not Mean PCs Are Coming Roaring Back (Seattle PI)
The Street is largely applauding Intel’s strong quarter and industry data that suggests PC sales could be staging a stronger-than-expected resurgence in sales this year.  However, Intel CEO Paul Otellini points out that he’s not quite ready to jump on that bandwagon: “I’m still not going to go out on a limb, and our customers aren’t going to go out on a limb, and say there’s a corporate refresh snapback cycle,” Otellini told the AP. “People are buying things to replace older machines because it’s just cheaper.”

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