Microsoft is playing catch-up. While large technology peers Cisco and Oracle have both added about 50 per cent to their market capitalisation this year, Microsoft waited until mid-year to join the party. The current strong run started only after its shares fell off a cliff in April.
Will Wednesday’s delayed launch of its Vista operating system keep the rally going?
Quite possibly. Vista will not have the huge uptake enjoyed by Windows 95, which was launched into a less mature PC market and contained a bigger architectural shift. But one silver lining from Vista’s delays is that there could be some pent-up demand after five years without a significant new launch. Also, Vista is arguably a bigger improvement – in areas such as graphical interface and security – than other launches since Windows 95.
So far, analysts are rightly not too aggressive about the level of extra demand Vista will create – in terms of customers accelerating their decisions to upgrade their PCs or software. Not least, corporate demand is likely to be small for at least the first six months. But Microsoft’s earnings will be sensitive to Vista’s performance. Sanford Bernstein estimates that 2 percentage points of additional Vista penetration in 2008 will boost Microsoft’s overall earnings by more than 2 per cent. It might also enjoy better pricing. That gives the potential for earnings upgrades, at a time when the group could also get a following wind from reduced Xbox losses, improvements in its internet business and other product launches such as Office 2007.
Although changes to the software industry from the likes of Google pose a serious threat, their impact remains unclear and some way off. Unless Vista bombs, Microsoft should increase earnings in the mid-teens for the next few years – with the chance of more if Vista outperforms.
But even with attractive short-term growth prospects, Microsoft still trades on a relatively modest 17 times next calendar year’s earnings, according to Goldman Sachs. Microsoft still has some space to continue its recent return to favour.