seekingalpha.com

That article exemplifies why someone should do their due diligence. Someone who only casually follows the company may think he has a point. The article was well written and brought up some good points, but was blatantly one sided and misleading.

Comparing Microsoft to IBM is wrong. Microsoft has a lock on the OS unlike IBM who never really had a lock on anything. Microsoft is more like eBay who has a lock on the auction business, eBay may lose their grip because people stop buying via auction, but no other company is going to overtake them at their game.

About two/three years ago there was tons of hype regarding linux. They came out with tons of slick interfaces and even one that mimicked Windows. It was free and it got plenty of free publicity as well. For a year that's all anyone talked about and even yours truly a big fan of the Microsoft company was taken in a little by all the hype, after all who could argue with free? The pundits predicted it would force Microsoft to dramatically drop it's price for the new OS to compete with completely free software. The attempt failed miserably, for many reasons. IMO, the biggest was software, driver & device support.

That was the best chance to make an indent in the OS market, now the hype is gone, Microsoft is actually offering premium versions of its OS for a lot more money which will give them much better margins and because the global economy is getting better more & more people in emerging markets can now afford to buy the OS instead of pirate it.

A few reasons why I think sales will be predictions:

1. Very few analyst reports I have read factor in the extra margins that will be generated by the new pricing structure.
2. Very few analyst reports I have read factor in that the Vista delays also caused a lot of people to delay their computer purchases, they were all waiting for Vista and unlike with other releases some people have been waiting over a year.
3. Many of the less technically savvy people are intimidated to wipe and restart their OS, after having the XP for four-five years their computers are clogged and their owners are looking to start fresh. With other releases there was less of this problem because the OSs came out every two years.

This is one of many waves predicting the demise of Microsoft, one day Microsoft will be toppled just like most other companies. It won't be happening anytime soon though.

Here is an email I just sent a friend of mine

1. I dont think the writer was emphasizing Linux as much as he was Mac's OS X. The sooner people (Microsoft) realize that Mac's OS is not a niche anymore (even though statistacly it may be considered as one), the better off they will be.
2. Every analyst on the planet factored in slower PC shipments due to a delay in Vista and they fully expect it to recover somewhat when it starts shipping. The PC manufacturers sure expect it to pick up. Look at the spot and contract prices for DRAM, that should give you an idea.
3. Microsoft has very little visibility looking forward in terms of OS updates and new versions. That is a huge problem. When Apple released Tiger there was already talk of Leopard. Every other business line for Microsoft is a joke.
One thing the article nailed was the Microsoft culture of infallibility.

Vista sales will be as expected, not to worry. Its the future that should scare the begeezus out of you.

1. Apple is expensive, and unless they open up their software to other hardware manufactures they'll always be a niche player. If they decided tomorrow that they will let other computer makers use their OS that would scare the hell out of me.

2. They all under-factored it, the reports that bothered to include their stats simply compared it to the XP delay/recovery. There are going to be significantly more sales this time around then when XP was launched. The only difference is that people are more wary of the first version this time around so some of that bump may take place in Q2

3. Simply not true, it's just lost in the shuffle of all the Vista hype, one of the big elements that got left out of Vista was a new file/database system. This is going to be the core of the new OS. Calling Office a joke would be a mistake, AFAIK it's the best selling software among Apple users. You also forget about Xbox and Microsoft's successful push into the PDA & smartphone software business. These are all fast growing markets that Microsoft is the leader in.

When I say OS I mean to include Office as well, my mistake. Look at the P&L statement for the Xbox, thats the bottom line. Factor in MSN.com and Zune as well, do I hear a Zune phone? Makes me laugh every time I think about it. As long as Steve is running the company he wont sell out on the hardware-software exclusivity, which I believe is unfortunate. Although once they realize that the Mac sales are/will be a very small percentage of the overall sales, I wouldnt put it past Steve to give up his OS or make a version for other PC manufacturers.

I guess it depends on what you mean by failure. I don't have numbers to back things up, but anecdotally I can say that I've seen novice computer users buying mostly macs and experienced computer users aren't buying new at all. They're diggin out P3s and P4s with under 1GB of ram and running Ubuntu or some other free Linux distro. I know one computer novice who uses ubuntu for an OS, firefox for a browser, and Google docs for office software, on a p3 with 512 megs of ram. Total cost? About $100.

Microsoft's OS price IS lower, btw, both in nominal and real terms. I think the linux movement has had massive impacts on the server business, and its effects continue to trickle down into the user market, and especially into the thin-client market.



International pricing differs from US pricing.



I don't know that anyone is prediciting the demise of MS, just that Vista is not redefining the marketplace or striking a major blow in the OS wars. I think that all the flurry right now is mostly ignorable. An OS is expected to have a multi-year lifespan, and no matter what, Vista will be a dominant OS by 2010. However, twelve years ago, MS was in much better shape. Apple was pre-iPod and linux was not a home OS. There were no real competitors. Today, MS has a new OS, a new music player, and a new video game console. None of them are generating any kind of buzz, and none of them are must-have products. MS will make plenty of money, and it's not going anywhere, but there can be no doubt that it does not have its finger on the pulse of home consumers, despite a huge effort to get back in touch. Actually, I think the real bellweather is the new Office suite. MS intentionally simplified and tried to bring users an attractive, highly functional product. If that fails too, MS wil have to go back tot he drawing board.

They said that Microsoft Money was a laugh and it would never make inroads into quicken. They said that Windows CE would never touch Palm. They said Xbox would be a flop and they should stick to PC software(It may lose money but it's no flop and will make them money eventually). they said phones would never run Microsoft software. It may take a few years but Microsoft will keep improving the Zune and it will get some market share.

Xbox making money "eventually", they have been saying that for 2 years now. That field was relatively new when the Xbox first hit the market, a lot unlike the MP3 market. Doesnt surprise me that MS software could grab market share, especially when the competition was weak to begin with.

That's fine, but linux or Apple market share isn't going anywhere that Microsoft needs to worry. The market share for Linux among end-users has gone up marginally. Most of the increase with Linux has been on the server end.

Take a look at this hardly a gathering storm threatening Microsoft.

2004 LINUX: 0.29%
2005 LINUX: 0.31%
2006 LINUX: 0.38%
2005 Apple: 3.25%
2006 Apple: 3.64%
2007 Apple: 4.07%




I don't know if the OS can be redefined. It's not like Apple or Linux redefined the OS. I think the OS for the PC will be improved on over the next few decades rather then be reinvented. I don't see Apple or Linux as real competition and I certainly don't see an OS war. These are niche products that may grow slowly but won't cut into Microsoft for a long, long time.
You're wrong about the Xbox not having buzz BTW, it generated a lot of buzz and people camped out to buy one.
Regarding office nothing else even comes close. I've tried Openoffice and it doesn't compare. The new office has a new navigation system (the ribbon) which may turn out to be groundbreaking. The media refuses to give Microsoft any credit for anything.

1. The previous Xbox was profitable toward the end of the product cycle, this Xbox will be profitable by the last quarter of 2007
2. The console field was anything but new when Microsoft entered it.
3. Quicken and Palm is not weak competition, they dominated their respective markets big time. Microsoft just kept chipping away closing the gap with each new version of software until they got market share. It ain't pretty, but Microsoft is stubborn, has lots of resources and will keep throwing money at it until they win.

The only example I could think of where they didn't win (in terms of software) is quickbooks. They keep trying though.

If MS finds comfort in those numbers that's fine. If you only fear a storm gathering when the clouds are already in sight, it's usually too late.

Anyone who learns how to use any OS other than Windows immediately understands the flaws, drawbacks and inconveniences of Windows. Many people have resigned themselves to difficult interactions with their computers, and the numbers exist to back that claim - a recent study showed that one in four interactions with the computer led to frustration for users.

I don't want to get into a fight about credit, or media or anything like that. Yes, the XBox generated some buzz, though nothing like the Wii. The Xbox 360 is barely noticed. OpenOffice has its adherents, but I didn't bring it up for a simple reason: 99% of the time you don't need anything more complex than googledocs or any of the web-based editing systems.

MS may find Vista to be a huge success, but I think that looking at it right now, Vista has had an underwhelming reception.

1. We'll see.
2. The turnover for new consoles is long enough for the market to be considered new every couple of years.
3. Its funny how you can apply that logic to Microsoft but not to any of its competitors. Talking about chipping away and closing the gap with each new version of software until they got market share, sounds a lot like Apple and Google. Both have plenty of cash and google in particular doesnt mind throwing it around.

The big difference is Microsoft has the momentum factor. Tons of software/hardware providers won't make their programs compatible with apple & linux because there are not enough people using them, people won't use the alternate OS because many programs are not compatible and even if the ones they use now are, they might want something in the future that won't be compatible. Google & Apple can't do anything about that.

Dare you to short Microsoft

Those aren't even clouds



Regardless of how good the actual OS is, it's the only one out there that will work with just about any scanner or piece of software. I'm not arguing that Microsoft has a good product. I'm arguing that we are stuck with it for years regardless of how good or bad it is. Most of Office sales go to businesses who need more then just a basic office suite so I'm not worrying about openoffice that also has been around for years and your avg. Joe never even heard of it despite being free.



Xbox 360 generated plenty of buzz, just as much as the Wii. I think your forgot because the Xbox was launched way before the Sony & Nintendo units.

Xbox 360 sold over 10 million consoles as of Jan 1 2007
Wii hopes to sell 6 Million by March 31 2007
Playstation 3 sold 2 million as of January 16 02007

Nah, I'm playing devils advocate for the most part. But I do think that things change and Microsoft has everything to lose. Whether or not it will happen within the next decade is debatable, but like GE I think the upside is limited.

I don't think Microsoft is going much higher then where it is now, I think it may dip another $1 but I do think they are going to surprise everyone this quarter or next and that could mean a $32-$33 which means you double your money if you have the right options.

GE will never blow anyone away, but I can't think of a better Super-Low risk company in the world.

Just a few stats here:

2002 EPS: .48 Stock Price: $26.15
2003 EPS: .69 Stock Price: $27.58
2004 EPS: .75 Stock Price: $26.80
2005 EPS: 1.12 Stock Price: $26.25
2006 EPS: 1.20 Stock Price: $29.91
2007 EPS: 1.47 (Projected)


Tell me this stock is not undervalued....

Vista will flop.

You mean people will be using the competition?

Nope, it was overvalued.

Because it's a low growth company? EPS growth has been ridiculous for a company that size.

Undervalued doesnt mean the stock price stayed the same for 5 years. For the first two years it was close to 50 times earnings, hardly an indicator. Trading at 20 times projected earnings I think is a fair multiple. Past price history doesnt tell you what is over or under valued.

Yes, however the company has had amazing growth. How high could expectations have been? Do you think the market factored in 2004 that the EPS would double in just 3 years? In 2004 everyone was saying that MSFT was a big slow moving tech company that peaked, they were not saying that EPS would double in three years.

The question is if MSFT is doing so much better then everyone expected, why doesn't stock reflect that?

It isnt uncommon for the street to be consistently wrong about something and to still continue believing that what they said in the past will hold true for the not too distant future.
Dont forget, the delays that Microsoft had in putting out Vista really hurt the credibility of the company in my opinion.

Even if all that is true, a 250 Billion dollar company that can double it's EPS in three years with no new products?

Regarding credibility: Microsoft has the worst and best credibility on the street. It's products have the worst credibility and always did (Windows jokes are as old as windows itself), it's numbers though have been rock solid and I never looked it up but I'm betting they never had a quarter with negative growth. NEVER.

Its not so surprising considering that this product is closely tied with general PC shipments.


Im talking about the ability to put out new products on a timely basis.

Then shouldn't you be bullish? Despite a domestic slowdown, PC sales will continue to grow year over year and global growth is still growing rapidly (some of them actually paying for Windows) Despite a higher P/E then I would normally like for a company like this I think the number is skewed higher because of the delayed Vista release.

A year from now I see the P/E at 17 in two years P/E at 13 (if bought at current prices) which is a great deal for a company that nobody argues will continue to grow over the next decade. You need to factor risk into the price as well, the lower the risk the higher the premium. With growth (even if its slow) locked in for the next decade the risk is minimal.

Maybe, but so what. They're the only game in town.

On the overall PC industry, yes. But I prefer to invest in the Semis who will benefit from this overall growth, the upgrade cycle and from other industries as well. I'll take the added risk for better growth opportunties.

Which ones? I have a big stake in Intel right now...

Mainly Intel. They are unleashing everything on AMD right now, kinda feel bad for them. I also like Sandisk obviously, and im warming up to Nvidia, we'll see if they can keep grabbing market share. I like the portalplayer acquisition and an improving MCP business. If Micron comes down to $10-$11 I'd be a buyer.

I'm looking to diversify into other areas that may benefit from the uptick in PC sales. Nothing catches my eye though. nVidia has been on a tear the last couple of years, Sandisk isn't heavily dependent on PC sales, Micron is pretty much a memory play and I don't follow the industry supply/demand on memory.

I think Dell has a lot of trouble ahead, but they still have a lot of believers out there that are ready to jump back in at the first hint of good earnings, I'm thinking of a short term Dell play as well but have yet to pull the trigger.

Many will be buying pricier machines because they're going to want it to be Aero compatible which means fatter margins.

If you have any ideas of who would most likely benefit from that let me know. I'm thinking Creative (they have a lock on the high end sound cards) but I didn't like what I read about the company.

Nvidia is the obvious choice, although as you noted, it is a little pricy. AMD is an option because of ATI, although they are a little behind. Sandisk introduced their new SSD's and rumor has it that it will be produced using x4 technology on a 45nm node. Although that is unsubstantiated. HPQ might be a good pick. Will benefit from lower prices in processors as the price war continues. They also developed a new technology which allows the wiring to be on top of the transistors as opposed to between. This allows for a lot more transistors to be placed on the same piece of silicon, improving performance. How HP uses this technology remains to be seen, but they have their own fabs so maybe they'll attempt to integrate it into their business model. Or they could just license it out.

HPQ has also been on a tear and I have an aversion to companies that are up 50% over the last year or so. I do like them as a company though as they have something Dell doesn't, an R&D dept. AMD 10-11 months behind Intel now, I wouldn't touch them until the next cycle (2-3 years)

That may not be a good thing.

I know, but everyone has their comfort zone. Plenty of people make money buying companies at their highs going with the upward momentum, I'm not one of them.

Nvidia reported earnings today, not bad at all. It appears the oversupply drifted over the GPU business. Nvidia stole more market share, increased their gross margins and introduced several new products this quarter. PortalPlayer integration is near completion, much much faster than anticipated. Guidance was strong going into a seasonally weak first quarter (at least I think so). ASP's are expected to continue climbing into fiscal 2008.