Microsoft will report its earnings tonight, and they come at a rare time for this company: A stuffed product pipeline, dual upgrade cycles for both consumers and the enterprise, and a general feeling that innovation is alive and well in Redmond.
Which all sounds good until you look at this company for the past decade, absorb the narrow range these shares have traded in and ask the difficult question of whether Microsoft is dead money, or really has something to offer?
I don't think anyone disagrees that tonight's report should be a good one, or that guidance might be good, or that innovation in Xbox, even Zune and the new Kin smart phone might be at least a little intriguing.
But in a climate where the bottom line is in fact the bottom line, investors still might be asking where the excitement is, where is the growth going to come from and are there any compelling reasons out there for investors to park some cash in this company?
Analysts are looking for 42 cents a share on $14.4 billion in revenue. Deeper into the report, individual business units will complete the picture: Windows business should do $4.2 billion; Server and Tools should come in around $3.7 billion; Online Services $575 million; Microsoft's Business Division $4.3 billion; and Entertainment and Devices $1.7 billion.
Looking ahead to the company's fourth fiscal quarter, the Street expects 45 cents a share on $15.18 billion. And for the full year, $2.01 on $61.5 billion.
We'll get an update on the Windows 7 upgrade cycle which apparently has been booming. PC sales continue to be robust, and Intel's guidance was a nice window into how sales might continue to go, and that certainly bodes well for Microsoft. Apple's news also suggests that the consumer continues to spend, and that might indeed be an Apple-only story but Microsoft might be able to attract a bit of that momentum. (Well, maybe.)
Xbox will see some nice upgrades later this year, and we'll get more details at the big E3 show in Los Angeles next month. Project Natal, a wholesale change in the way game players interact with their consoles by using their bodies instead of traditional hand controllers, is a kind of console upgrade-cycle "lite" for Xbox and may spur sales into the fall and holiday shopping quarters.
But the company will be up against stiff competition from Sony and its new "Move" controller. Activision just increased its guidance, so maybe gaming once again is getting interesting. But even all of that isn't enough to move the needle when it comes to the bigger Microsoft story.
Same goes with Bing, which continues to build a base in the Search marketplace, but is gobbling up scraps very, very slowly. Again, interesting, but nothing to write home about when you're going up against Google . An update from Microsoft on its partnership with Yahoo will build nicely on the news Yahoo itself had to share earlier this week with its earnings.
So back to the "dead money" question. A year or two ago, the answer was almost a no-brainer. Microsoft shares had done nothing over the past decade. But lately, they've shown new signs of life, and that bodes well for the short term. I'm not talking explosive growth here, or monumental moves, the kinds we've seen with Apple, or Netflix or other high-flyers.
But the risk isn't nearly as much with Microsoft as it is with other faster movers in tech right now. Stodgy? Yes. But room to grow? Absolutely. Nothing wrong with 7 percent, 10 percent, 12 percent, even 20 percent, especially when you're talking about the underlying security and certainty of Microsoft's business.
And consider the opportunities immediately available, says Pacific Crest's Brendan Barnicle: "The products are just a cash machine," he tells me this morning. He says 900 million PCs are still running Vista or XP. "That's a $50 billion opportunity for Microsoft."
On the server side, the news is equally good. "There's probably a $25 billion opportunity on that side of the equation; that's a $75 billion opportunity total just on upgrades alone." And Intel confirmed that the enterprise is just now beginning to spend on upgrades. Microsoft is at the nexus of that market place cash infusion. (Barnicle has a $40 target on these shares, by the way.
The company doesn't offer any guidance so we'll be forced to read the tea leaves on the conference call. But it appears that the wind is definitely at Microsoft's back. We'll know just how stiff that breeze is after the close tonight.
Microsoft might be a secure place to park some money. Kind of like tech's version of a bond. There's almost a certainty of some kind of pay off, and while it might take a little while, it'll get there.
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