THE MICROSOFT INVESTOR: Analysts Like WP7, But Microsoft Has A Mean Game Of Catch Up To Play

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Windows Phone Event

MSFT Flat As Equity Averages Sink
The markets are under pressure in early trading as most investors await news from the Fed’s September meeting. Shares of MSFT are trading sideways. Upcoming catalysts include third quarter earnings release on Thursday, October 28 at 5:30pm ET; upgrade cycles of Office 2010 and Windows 7; any entrance into the tablet market (even just as an operating system); the launch of Windows 7 mobile yesterday; any adoption of Azure (cloud computing); and gamer reaction to Kinect. The stock currently trades at 8x Enterprise Value / TTM Free Cash Flow, inexpensive compared to historical trading multiples.

Wall Street Is Cautiously Optimistic About WP7, The Standard Analyst Response (The Wall Street Journal)
Which basically means, it’s ok, but who really knows. Some highlighted thoughts:

  • Adam Holt at Morgan Stanley is cautiously optimistic that Microsoft can differentiate its mobile platform through: 1) seamless interoperability with productivity apps (Office); 2) tight integration with social and email platforms; 3) compelling Xbox Live functionality; and 4) a consistent experience regardless of the handset or carrier. While there is risk that the company is late to the party, ~$400 million in marketing spend should reverse share losses next year. Good news for the stock, given the extremely low expectations.
  • Citigroup analyst Walter Pritchard is trimming his Microsoft estimates on weaker than anticipated PC sales (he’s a bit tardy, but better late than never). He doesn’t assume that the PC market gets much worse from here, but continues to slow, in line with industry forecasts. Walter also made minor changes to Xbox estimates and and unearned revenue. He also lowered his price-target on the shares to $30, in-line with large cap tech peers.
  • Kash Rangan at Bank of America Merrill Lynch believes that the new mobile OS focuses squarely on integrating Microsoft’s ecosystem, catering to both the consumer and the enterprise. Given the large number of developers, Kash wouldn’t be surprised to see the WP7 marketplace quickly increase in size. He sees a potential Windows 7 corporate PC refresh cycle and the recent Office 2010 release as key catalysts for the stock. He also believes the stock multiple could improve if investors gain confidence in sustainability of results and if the management executes in the mobile and tablets sectors.

Microsoft Has Second Lowest EBITDA Growth In Software Industry (Investor’s Business Daily)
Here are the five companies in the systems software industry with the lowest EBITDA growth (next year estimate vs. LTM).  CA Inc (CA) has the lowest with EBITDA growth at 7.2% with Microsoft a distant second at 18.9%. EBITDA growth can be valuable in predicting future cash flow generation and earnings power. [Progress Software (PRGS) has EBITDA Growth of 21.5%;  Evolving Systems (EVOL) at 21.6% and Check Point Software Technologies (CHKP) at 23.8%.]

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