Microsoft's Time Has Finally Come

Mark Lennihan

Microsoft

Are we on the verge of a new era for Microsoft?

The short answer is, "very likely," as long as investors aren't looking for explosive growth and will be happy with steady, predictable growth.

The company will report earningsafter the bell tonight, and while this company has been a dog of a stock for the better part of a decade (unless you were able to miraculously time your ins and outs of these shares have done virtually nothing) the tide might finally be turning for these guys?

Doubt it? Consider: Windows 7 has garnered rare, positive reviews and will ship ahead of schedule, in time for the back-to-school shopping season and in time to take advantage of the anticipated economic turnaround toward the back half of 2009 which could spur a nice enterprise upgrade cycle among Microsoft's biggest corporate customer. A new version of Microsoft Office 2010 is ready for an on-time release. The new search engine "Bing" is also capturing market share from Google , even if only slightly. The search partnership with Yahoo is still a possibility and that would be good for both sides. Xbox and the gaming business might be suffering, but that won't last forever and it promises to pick up around the holiday shopping season.

Microsoft was a $15 stock during those March lows, and has been steadily climbing ever since. And for good reason. And could likely continue since the rally is noticeable, and yet Microsoft, a Dow component, is sorely under-owned by major institutions. It's better today than at the beginning of the year, but still very low. Shares up 24 percent year to date, a nice recovery from the 45 percent plunge they suffered last year.

Tonight, the Street is looking for 36 cents on $14.38 billion in revenue, though I've talked to a number of analysts who fully expect the company to beat consensus and possibly raise guidance. That's certainly nice, but keep in mind that a year ago, Microsoft earned 46 cents on nearly $16 billion. Recessions, unless you're Apple, can be brutal.

Brendan Barnicle at Pacific Crest is expecting some good numbers from Mr. Softee. On EPS, he anticipates 38 cents. On revenue, $14.98 billion. On a unit by unit basis, Barnicle is looking for Client Revenue of $3.6 billion versus consensus of $3.3 billion; Server and Tools, $4 billion versus consensus of $3.8 billion; Online Services, $725 million versus $730 million; Business Division, $5 billion versus consensus of $4.96 billion; and Entertainment and Devices, $1.65 billion versus $1.52 billion consensus.

It's no secret IT spending has been next to nothing recently, and we've gotten mixed signals lately as to when it'll pick up again. That means Microsoft's commentary on PC sales and what the company is seeing on the enterprise will be very important tonight. Real, meaningful guidance as far as revenue and EPS is a long-shot as Microsoft moves away from that practice, so don't count on specifics.

Still, when I suggest Microsoft's time has finally come, the statement is steeped in momentum, trends, and what CEO Steve Ballmer has told me through the course of this year; that Microsoft is tired of having other companies tell its story for it (hear that, Apple?) and that it would become more aggressive in marketing itself, by communicating with the Street and the media about where it's headed and how it's going to get there. The stance seems to be working: The company's shopping ads, a direct swipe at Apple and its higher priced Macs, seems to be resonating with consumers; and Ballmer himself has scoffed at Google's foray into the operating system business.

Rhetoric hardly replaces results, but Ballmer and his team's approach in the market seems to be working. The company will have to come up with something special tonight to keep the recent rally going, but even if there's a sell-off on the earnings news tonight, I suspect it'll be brief as institutions and other investors look to snap up shares on any weakness. Microsoft is becoming interesting again.

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