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Published: June 16, 2010
Those prescient words, uttered by Chauncey
the Gardener in the film Being There, is an annual rite
of passage for tech stocks, which tend to rally each spring. Not
this time. Instead of growth, the group has fallen sharply,
thanks to a high degree of exposure to Europe and the weaker
euro. The pain has been especially notable for Microsoft (Nasdaq:
MSFT), which has lost roughly $45 billion in
market value this spring.
While the weakening euro will surely crimp profits in the
current quarter, Microsoft has more than a few arrows in its
quiver -- a point brought home at a technology conference this
past weekend. Microsoft unveiled a new product, called Kinect,
which may not have a huge impact on the
bottom line, but should show investors that it can still
create compelling software and generate impressive synergies in
its various divisions.
The Next Wii
While Microsoft and Sony (NYSE: SNE) were busy one-upping
each other for the title of most hardcore video game platform
developer, Nintendo went the other way. Its Wii platform proved
to hold great appeal for families that didn't tend to like shoot
'em up or racing games. The Wii's motion-sensing technology let
users play an interactive game that got users up off the couch.
Microsoft's new Kinect will match the Wii's functionality, with
a host of other features to boot.
Rather than wave a wand as Wii users do, Kinect will come with a
full set of body motion sensors. This will allow for full 3-D
motion capture and facial recognition. Built in microphones will
also allow for voice-based interactivity with the device. Most
importantly, the (estimated) $150 device is simply an add-on to
Microsoft's existing Xbox console, extending the expected usable
life of that platform for many years. By adding features such as
a massive hard drive and WiFi and incorporating access to social
networking sites and the ESPN sports network, Microsoft views
the platform as a potential all-in-one gaming and entertainment
device.
Microsoft is
unlikely to make
money on the Kinect
hardware, but
high-margin software
sales could get a
solid lift while the
company also signs
up more subscribers
to its $50 annual
plan that provides a
range of premium
services like
multi-player online
gaming. Kinect is
expected to be
released later this
year ahead of the
key holiday selling
season.
Most importantly,
Kinect could give
investors a sense
that Microsoft is
once again a
cutting-edge
entertainment
company, justifying
the untold billions
it has poured into
video games, MP3
players and online
platforms. A
smartphone or tablet
device like the
iPhone or the iPad
that runs on
Microsoft software
could ultimately tie
all of these
offerings together.
Unfortunately,
Microsoft is behind
schedule on this
effort, and the
company thinks it
will be several more
quarters before it
can release a
stripped-down
version of its
Windows 7 software
to power such a
device.
Waiting for the
Cycle
When Microsoft
released Windows 7
last year, it hoped
many enterprises
would notice the
sterling reviews and
decide to upgrade
their computer
systems. But IT
spending has been
cautious thus far. A
turn may be at hand.
Goldman Sachs
(NYSE: GS)
recently surveyed
large firms and
found that an
increasing number
expect to finally
move to Windows 7 in
the second half of
this year and the
first half of 2011.
That migration is
seen as the biggest
potential catalyst
for shares.
Action to Take
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Analysts think
Microsoft can boost
sales close to +10%
in the
fiscal year that
begins July 1 as the
Windows 7 upgrade
cycle begins in
earnest. Profits
should grow at a
slightly faster pace
thanks to an ongoing
stock buyback plan
that has already
eliminated 1.5
billion shares from
the market during
the past three
years. If the new
Kinect is a hit with
consumers, investors
are likely to reward
the entire consumer
division with a
higher valuation,
pushing shares back
up into the low to
mid-$30s, implying
+20% to +30% upside
with very little
downside.
-- David Sterman
Staff Writer
StreetAuthority |
