THE MICROSOFT INVESTOR: Analysts Are Bullish But Need An Upside Surprise For Stock Not To Dive

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MSFT Down As Market Slides
Weak earnings and gold prices hitting their lowest levels since October are pulling the broader markets down. Shares of MSFT are down with the rest of technology. Upcoming catalysts include holiday quarter earnings results announced after the close on Thursday, January 27; entrance and uptake in the tablet market (a ways off); Windows Phone 7 adoption; strides against current market leaders in cloud computing; and continued momentum of Kinect as well as other uses for the technology. The stock currently trades at 9x Enterprise Value / TTM Free Cash Flow, inexpensive compared to historical trading multiples.

Microsoft Earnings Preview: Weak PC Sales Should Be Offset By Enterprise Spending And Xbox (Barron’s)
Some Wall Street commentary:

  • Brad Reback, Oppenheimer & Co.: Reiterates an Outperform rating and a $32 price-target. He argues the consensus for this year and next year’s revenue and profit is too low. Reback also believes that the Street is too pessimistic on PCs and server sales.
  • Sid Parakh, McAdams, Wright, Ragen: Reiterates a Buy rating and a $34 price-target. He expects enterprise spending was strong and offset any slack from the PC side of things. The one weak spot will likely be sales of Windows Phone 7 devices.
  • Adam Holt, Morgan Stanley: Reiterates an Overweight rating and a $32 price-target, although he sees factors such as stepped-up enterprise buying adding 10 cents to 20 cents to earnings this calendar year, perhaps pitching the stock toward a “bull case” price of $37.

The Top 10 Ways Microsoft Could Surprise Investors (Barron’s)
Expanding on Morgan Stanley’s note to investors, Adam Holt believes that Microsoft could surprise on 10 fronts:

  1. Sales of Office 2010 could beat expectations thanks to bundling, better average selling prices, increased spending
  2. The corporate PC buying upswing could prove stronger than expected
  3. Software Assurance, a package of support and updates on Microsoft software, could see its “attach rate” improve
  4. Kinect could sell over 15 million units in the fiscal year ending in June, versus his expectations
  5. Kinect and the Xbox could turn out to be more profitable than expected
  6. Microsoft could post less of a loss in its online business
  7. The Azure platform (cloud computing), could turn out better than expected
  8. Tablet cannibalization of PCs could be lower than anticipated
  9. Expectations for Microsoft’s chances in mobile devices with Windows Phone 7 are super-low at this point, but that could surprise
  10. Microsoft’s consent decree with the U.S. Department of Justice expires on May 12th, meaning some 600 jobs could be eliminated

Not the most exciting top 10 list I’ve seen, but there’s potential.

Microsoft Needs To Surprise For The Stock Not To Sell Off (Seeking Alpha)
The issue with Microsoft is not the company’s earnings, but its price action following earnings. It’s usually soft. The shares usually enjoy a nice rally into earnings and then give some back after investors digest the news. In four of the last six quarters, the stock has declined in both the one week and two weeks after reporting. The market needs to be surprised for the stock to run, and expectations are high.

Microsoft Needs To Prove There Is Life Outside Of Businesses Tied To PCs (Associated Press)
Analysts expect Microsoft’s net income to slide about 7% ($0.69 / share) as revenue edges up just 1% ($19.2 billion) when the company reports earnings on Thursday. Microsoft needs to prove its core businesses (Windows, Office, servers and tools) are chugging along at a healthy rate. But Investors are paying an increasing amount of attention to Microsoft’s non-PC business. The holiday success of Kinect and Xbox 360 should ease concerns, but investors still worry about slow improvement in search traffic, Microsoft’s latecomer status in smart phones and the lack of Windows tablets on the market to compete with the iPad.

Could Microsoft Be The Comeback Kid In Mobile? (Reuters)
Mobile software developers remain fixated on Apple and on Android, but Microsoft and Research In Motion are making inroads as tablet offerings multiply, according to a new study out from IDC. Windows Phone 7 rose 8 points to 36% ‘very interested’ due to a better-than-expected launch. Respondents said that Windows Phone’s improved UI was a critical factor for the increase. It’s a start.

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