The Microsoft Investor is a daily report from SAI. Sign up here to receive it by email.
Photo: Dan Frommer, Business Insider
MSFT Sideways In Positive Market
Markets are reacting positively to a coordinated effort by the ECB to supply banks with dollar loans to offer liquidity into the strained European banking system. Shares of MSFT are bouncing along after yesterday’s less than stellar analyst day (see below). Upcoming catalysts include Windows 8 and entrance into the tablet market; Windows Phone 7 / Mango rollout and 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 console. The stock currently trades at 7.6x Enterprise Value / TTM Free Cash Flow.Investors Not Impressed At Analyst Day (Reuters)
A rising tide of investor agitation over Microsoft’s static share price and bulging cash hoard made no mark at the software company’s annual meeting with Wall Street yesterday. No one even asked the question about the increase in dividend. Questions predominantly focused on the new Windows 8 and broader strategic questions on how Microsoft is tying together its software for PCs, tablets and phones in the age of cloud computing. It was really clear that Microsoft has no big ace in the hole to drive growth this year.
Analysts Aren’t Blown Over Either (Various)
The Street weighs in:
- Goldman Sachs: Heather Bellini notes that a Windows 8 tailwind to revenue would not occur until general availability, which could be around the September 2012 quarter. She expects a soft macro environment and weakness in developed market PC shipments and Windows server shipments to weigh on revenue growth in the near-term. As such, Heather is maintaining her Neutral rating and 12-month, $29 price target.
- Bernstein Research: Mark L. Moerdler believes threats from tablet growth, alternate operating systems, and cloud computing are manageable which should warrant at least a 9.5x multiple ex-cash. The current share price embeds an unrealistically bad scenario of no to negative perpetual growth. A Windows 8 ARM tablet running legacy Windows applications will reinforce Microsoft Windows has a future contrary the bad scenarios.
- Morgan Stanley: Adam Holt believes that the analyst day highlighted the next stage in the evolution of Windows, and a fundamental shift from products to services and PCs to a broad range of devices. He left feeling more optimistic that the Windows 8 releases will be catalysts in the second half of next year. At 9x EPS, the growth story at Microsoft is undervalued and he remains a buyer.
- Nomura: Rick Sherlund believes initiatives announced will be significant in enabling the company to address tablet and touch capabilities, in addition to new cloud-based services. However, these initiatives are likely to take time, probably a year, before they’re ready for prime time. Investors will have little immediate gratification and will need to be patient when waiting for Microsoft’s repositioning. No change to estimates or Buy rating.
Not doom and gloom, but it’s going to take a while.
Analyst Day Highlights (Various)
- Windows Phone (All Things Digital): Steve Ballmer said Windows Phone has not been flying off store shelves as well as he hoped, “We haven’t sold quite as many as I would have liked in the first year.”
- The Cloud (WSJ): Microsoft is “re-imagining” every part of its software empire to run on and through the cloud
- Developer Interest (Bloomberg): Developers have downloaded 500,000 copies of the preview version of Windows 8 since its debut earlier this week.
- Zune (Business Insider): Even failed businesses are helping. Specifically, the Zune music service means that Microsoft has an iTunes equivalent for Windows Phone, and it didn’t have to build it from scratch.
Microsoft, Yahoo And AOL Team Up To Take On Google (All Things Digital)
In an effort to outsmart Google, AOL, Yahoo and Microsoft have reportedly agreed to share remnant ad inventory with each other. Can anyone say collusion? Bing now powers Yahoo search in North America and the two companies share advertising sales and revenue, but Google still brings in the lion’s share of online-ad cash. Under the plan, each of the companies will sell each other’s “Class 2 display” inventory or leftover banner ads the companies can’t sell on their own. Why doesn’t Microsoft just buy both companies?
Display Ad Market Statistics To Highlight New Partnership (eMarketer)
Some quantifying numbers:
- Yahoo!’s share of the US display ad market is expected to decline to 13.1% in 2011, down from 14.4% in 2010. Microsoft’s share of the overall US market will fall to 4.9%, down from 5.1%, while AOL’s share will fall to 4.2% this year, down from 4.8%.
- Both AOL and Yahoo are losing market share to the fast-growing display businesses of Facebook and Google. Facebook will leap over Yahoo! in US display ad revenues this year, growing to 17.7%, up from a 12.2% share last year.
- US display advertising revenues at Google will top $1 billion for the first time in 2011, as the company’s share of overall US display revenues grows to 9.3%. That’s up from 8.6% share last year.
Three wrongs make a right?
Why Does Microsoft Keep Showing Unfinished Products That Won’t Launch For Years? (Daring Fireball)
Windows 8 reportedly isn’t coming out for at least a year. The demo tablet hardware from Samsung, spec-wise, is much more like MacBook Airs than iPads. How will Windows 8 run on such hardware? When will they actually ship? How many as-yet-unannounced iPad 3s will Apple have sold by the time the first Windows 8 tablet hits stores? It’s all in the future. All potential, nothing actual. Think about how different Apple’s and Microsoft’s approaches are.
Bing Is Coming To Navigate Xbox (The Microsoft Blog)
For some, the Xbox 360 is becoming more of an all-around entertainment platform. And, according to Ballmer, “the content choices on Xbox will grow dramatically from hundreds of thousands to millions” this year, especially as Microsoft adds live TV to the mix. This is one of the reasons why the company continues to invest in search, even though it’s a money-losing business and Google’s market share is so big (and not really declining).
NOW WATCH: Tech Insider videos
Business Insider Emails & Alerts
Site highlights each day to your inbox.