THE MICROSOFT INVESTOR: Microsoft's iPad Killer Is Lame; Will It Buy Citrix?

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MSFT shares flat today as market focus turns to Goldman hearing.  After weakness following in-line quarterly results, MSFT came back somewhat yesterday, closing at $31.11.  The stock has rallied with the market and 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.

M&A Activity Heating Up In Software Space, Says FBR; Citrix A MSFT Acquisition Candidate (FBR Capital Markets)
A team of FBR Capital Markets analysts believe improving strength in the PC market could lead to more M&A activity in the space as companies look to put their cash to use.  Microsoft, with $40 Billion in cash, can clearly be active.  “Since the company’s inception, Citrix has been partnering with Microsoft, which has fuelled speculation around the ultimate marriage between these two companies for an extended period of time. That said, we believe the time could be ripe to combine these two companies to ultimately better position Microsoft on the cloud computing front, an area which is set to shape the next computing paradigm.”  We think the two companies would be a good fit, but Microsoft might continue to increase its share in the cloud computing industry before making an acquisition of this size. The company is currently third behind VMWare and Citirix, with Google aggressively entering the space too. 

Microsoft releases beta of Windows Home Server ‘Vail’ (ZDNet)
ZDNet’s Mary Jo Foley profiles the beta release of Windows Home Server “Vail.”  “Vail, the next version of WHS [is] built upon “both on-premises and cloud technologies” for home and SOHO (small office/home office) users.”  According to Foley the product is likely to ship this calendar year.  Of course, this isn’t going to impact the stock, but Microsoft needs to aggressively compete for share of cloud computing in order to maintain the relevancy of the company’s flagship Windows product (which still drives the company and generates tons of free cash flow).  This isn’t a cloud product, per se, but it will at least allow MSFT to get some of the cloud lingo in there.

Microsoft Courier Will Find It Difficult To Compete With The iPad (Business Insider)
As Apple’s iPad seizes the world consciousness, there is pressure on Microsoft to compete, lest Microsoft’s Windows franchise is left behind.  But, like the company’s mobile effort, Microsoft’s tablet initiative, the Courier, has not been received well.  Business Insider’s Jay Yarow compares the growing list of competitors in the tablet space and has this to say about the Courier: “We’re still interested in seeing this thing in real life, but we’re not as crazy about it as we were on first blush.”  Looks like Microsoft may have to go back to the drawing board (and actually release something) if it really wants to compete in this space.

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