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:
(Chart Source: Kapitall.com)
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:
values in millions USD
Data Source: Kapitall.com
In the last four quarters, receivables declined, while inventories remained elevated:
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.
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