How Windows Surface Pro Will Move Microsoft Shares

Chris is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

When the Windows 8 operating system was released, investors promptly took profits in Microsoft (NASDAQ: MSFT) as they sold off shares. Microsoft peaked at around $31 by late-September 2012. Since mid-November, its shares remained narrowly range-bound between $26.40 and $27.70:


<img src="/media/images/user_15008/msft20130104_1_large.jpg" />

(Chart Source:

Investors were disappointed that initial sales in Windows 8 operating systems were weak. Sales for its Tablet RT device are expected to be tepid, too. In late-January 2013, Microsoft will release its Surface Pro tablet, as reported by the verge. The Pro device differs from the RT. Crucially, the Pro will Windows-based software.

To summarize, the Surface Pro will be priced from $899, will run an Intel Core i5 processor, have 4GB memory and 64GB storage, and will support a 1080p HD display. The device will also have a microSD slot and a USB 3.0 port.

Should investors be bullish when a fully-functional tablet is released?

Microsoft shares are valued at a forward P/E of 9, which is less than half than competitor Google (NASDAQ: GOOG), whose forward P/E is 20. Google is better-positioned in growing advertising revenue from its search, since the company accounts for 66.9% of all searches. More recently, Microsoft managed to hold steady its search engine traffic. Yahoo (YHOO) accounted for 12.2%.

Investors are discounting the value of Microsoft’s Office Suite while rewarding a rich valuation for Google Docs. The release of the more powerful Surface Pro could appeal to users who demand a more capable Office suite, and will likely promote the use of Bing search as a default. For now, the device could still be regarded as being too high. This will limit the potency for a higher share price after the tablet is released. When the keyboard is included, the Pro will cost more than $1000.

Valuation and Balance Sheet Analysis

Microsoft has a P/E of 14.3x and pays a $0.92 dividend, or a yield of 3.44%. Other than its cash balance declining from 12/31/2011 to 9/30/2012, there are no red flags on its balance sheet. In the last four fiscal years, both inventory and receivables increased:

<table> <tbody> <tr> <td> <p> </p> </td> <td> <p><strong>6/30/2009</strong></p> </td> <td> <p><strong>6/30/2010</strong></p> </td> <td> <p><strong>6/30/2011</strong></p> </td> <td> <p><strong>6/30/2012</strong></p> </td> </tr> <tr> <td> <p>Inventory</p> </td> <td> <p>717</p> </td> <td> <p>740</p> </td> <td> <p>1,372</p> </td> <td> <p>1,137</p> </td> </tr> <tr> <td> <p>Receivables</p> </td> <td> <p>11,192</p> </td> <td> <p>13,014</p> </td> <td> <p>14,987</p> </td> <td> <p>15,780</p> </td> </tr> <tr> <td colspan="2"> </td> <td> </td> <td> </td> <td> </td> </tr> </tbody> </table>

values in millions USD

Data Source:

In the last four quarters, receivables declined, while inventories remained elevated:

<table> <tbody> <tr> <td> <p><strong> </strong></p> </td> <td> <p><strong>12/31/2011</strong></p> </td> <td> <p><strong>3/31/2012</strong></p> </td> <td> <p><strong>6/30/2012</strong></p> </td> <td> <p><strong>9/30/2012</strong></p> </td> </tr> <tr> <td> <p>Receivables</p> </td> <td> <p>13,643.00</p> </td> <td> <p>10,961.00</p> </td> <td> <p>15,780.00</p> </td> <td> <p>9,871.00</p> </td> </tr> <tr> <td> <p>Inventory</p> </td> <td> <p>1,351.00</p> </td> <td> <p>1,412.00</p> </td> <td> <p>1,137.00</p> </td> <td> <p>1,624.00</p> </td> </tr> <tr> <td colspan="2"> <p><strong>values in millions USD</strong></p> </td> <td> </td> <td> </td> <td> </td> </tr> </tbody> </table>


Microsoft shares appear fairly valued. Sales of the Surface RT are not expected to be overwhelming, so investors should not anticipate sales in the Pro tablet to act as a catalyst. Microsoft’s first goal will be to drive sales for its desktop operating system upgrade, Windows 8. Early reports suggest that Windows 8 did not support stronger demand for PCs during the holiday. Investors should expect shares in Microsoft to remain range-bound for the early-part of 2013. It will take several quarters before interest in the upgraded operating system improves. Advertising spending by Microsoft for its Windows Phone 8 and its tablets should generate interest. When the next-generation Xbox is released, possibly in 2014, consumers will have a better reason to embrace integration amongst Microsoft's products.

chrispycrunch has no position in any stocks mentioned. The Motley Fool recommends Google. The Motley Fool owns shares of Google and Microsoft. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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