THE MICROSOFT INVESTOR: How Will The Decline Of The PC Affect Earnings?

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MSFT Rebounding As Market Fights Back
The market is bouncing back after a mid-morning dip. Philly Fed numbers missed expectations as jobless claims plunge. Shares of MSFT rebounding after a soft opening. Upcoming catalysts include second fiscal quarter earnings results tonight at 5:30 p.m. ET; Windows 8 next year; entrance into the tablet market; Windows Phone 7 adoption with hardware partner Nokia; strides against current market leaders in cloud computing; making money in the online business, including integration of Skype and improving the search / display business; and continued evolution of Kinect and next generation Xbox. The stock currently trades at 7.7x Enterprise Value / TTM Free Cash Flow.

Microsoft Reports Calendar Fourth Quarter Earnings After The Close (Silicon Alley Insider)
Join us for LIVE coverage and analysis of Microsoft’s quarterly results.

Quarterly Preview: Analysts Weigh In On What To Expect Tonight (Various)
What the Street is saying:

  • Citigroup: Walter Pritchard is lowering estimates to reflect PC softness which is largely already baked into expectations. This is driven by weak consumer demand and component constraints during the quarter. He is decreasing Client revenue by ~$250 and EPS by about $0.02. The next catalyst for the stock is Windows 8 beta and signs of build plans from hardware makers. He believes the market remains overly pessimistic and reiterates his price-target of $35 per share.
  • Morgan Stanley: Analyst Adam Holt believes that this will be a transitional quarter for Microsoft. He is comfortable with his estimates of $20.7B in revenue and $0.75 in earnings. That said, if we this year’s catalysts (improving margins, emerging markets, Windows 8) prove successful, this quarter shouldn’t matter as a reason to own the stock. Microsoft currently trades at 9x calendar 2012 EPS estimates which is below the S&P at 11x. He reiterates his Over Weight rating and $33 price-target.

  • Nomura: Rick Sherlund reduced his Microsoft estimates to reflect a more negative impact from the HDD supply constraints (flooding in Thailand). He is now assuming the decline was more like 7% (greater than the 1% decline largely assumed). While the near-term numbers are lower, there is no change beyond the March quarter and his positive thesis remains: Windows 8, Windows Server 8, Office 15, and Windows Phone 8 will drive revenue and earnings growth acceleration. He continues to rate Microsoft a Buy with a $32 price-target.

This quarter doesn’t sound pretty, but it will no doubt be a big year for Microsoft.

Wal-Mart Trying To Gain An Edge, The Lumia 710 Isn’t In Trouble (eWeek)
Days after Nokia’s Lumia 710 arrived on store shelves, Wal-Mart began offering the mid-range smartphone for free with a two-year contract. T-Mobile and Best Buy continue to sell the device for the regular $49.99 with two-year contract. Despite the tech pundit frenzy calling for failure already, Wal-Mart’s price reductions seem more about one company’s attempt to give itself an edge over the competition. That said, Nokia is apparently dealing with pricing pressure in other markets (like the U.K.).

Video Hours Consumed Up Big On Xbox (Business Insider)
The hours of video consumed on Xbox Live increased 140% in 2011, according to BMO Capital Markets analyst Edward Williams.  The number of Xbox Live users accessing entertainment apps increased almost 50% in November to December alone. This underscores the potential of the ‘connected TV’. That consumers are eager to easily access quality content and are not particular about where it comes from.