THE MICROSOFT INVESTOR: Will Europe Kill The Tech Recovery?

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MSFT flat as investors worry about Europe and the tech recovery.  After almost $1 gains yesterday the MSFT shares are giving back a little this morning – essentially flat at $28.90.  The stock has rallied over the past year with the Windows 7 release, but 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.  The next major catalyst is Office 2010.  MSFT currently trades at 15x 2010E P/E – inexpensive compared to historical trading multiples, but Microsoft’s rapid growth days are likely behind it.

Weak European Economies Could Cause The Tech Recovery To Stall In 2H10 (Macquarie Research)
Investors cheered when Q110 industry data highlighted a better-than-expected recovery in tech spend by businesses.  Many analysts increased their estimates for full-year PC and Chip shipments as a result.  Still, Macquarie Research analyst Shawn Webster says not so fast: “Our belief is the biggest potential risk on the uncertainty in Europe/Greece and (importantly) the global stock reaction is a pullback in GLOBAL corporate/consumer spending on electronics equipment which could negatively impact our assumption for stable/good end demand and exacerbate an expected semiconductor inventory correction in 2H10.”  It’s too early to tell what impact concerns about Europe will have on tech spend by businesses (Microsoft’s Windows franchise depends heavily on this).  If it does cause a pullback, MSFT investors will likely not be happy since the long-term outlook for Microsoft is challenged as well.

Bing Gains Search Share, But mostly From Slideshow Features (Jefferies)
Google lost 60 basis points of search share in April while Bing gained about 10 basis points of share.  The results suggest Bing’s share gains are gaining leverage despite scepticism that the improvement could continue.  Jefferies analyst Youssef Squali applauds the results: “The combined share for YHOO and MSFT was 29.3%, up~80bps m/m and the highest it has been so far. With YHOO’s share added to Bing’s share in 4Q10, we believe Bing will become a viable competitor to Google.” However, Business Insider’s Dan Frommer points out that these gains were mostly driven by slide show features, which are probably not sustainable.

Sell MSFT On The Office Web Apps News Tomorrow! (Minyanville)
Minyanville’s Bob Faulkner thinks investors will get excited about the Office Web Apps announcement tomorrow – essentially Microsoft’s answer to Google Docs for the enterprise.  Here is his logic: “Office Web Apps is little more than Mr. Softee’s version of Google (GOOG) Docs and, like its predecessor’s, Office Web Apps is free. Here the objective is to entice the user to step up to the full-blown version. But that’s unlikely to happen and we wouldn’t be seeing Office Web Apps if Microsoft weren’t seeing Google Docs making a dent in its Office franchise.”  Faulkner thinks Microsoft’s valuation is too rich given the risks to its flagship Windows franchise and thinks investors should sell the MSFT shares on tomorrow’s announcement.

HP Will Ditch Microsoft After Buying Palm (TheStreet.com)
TheStreet.com’s James Rogers thinks Hewlett-Packard may ditch the Windows OS they currently use for tablet devices in favour of the OS recently acquired through the acquisition of struggling smartphone company Palm.  “Unsurprisingly, the operating system is seen as the jewel in Palm’s crown, and there has already been chatter that WebOS has ousted Microsoft’s(MSFT) Windows 7 from H-P’s forthcoming tablet, dubbed the Slate.”  Microsoft’s mobile and tablet efforts are sputtering at best.  HP has not seen much leverage from its tablet business either.  As a result, the use of the Palm OS on HP tablets isn’t a killer for Microsoft’s Windows.   

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