After dropping below $29 in November 2012, Microsoft (MSFT) shares remained range-bound between around $26.50 and $27.70. In that time, Microsoft said it sold 60 million copies of Windows 8, in part from a $40 promotional upgrade price. Microsoft is ending the promotional pricing strategy in February. Upgrading to the Pro will cost $200, while the standard edition will be $120 and the Pro Pack will be $100. To determine if Microsoft will be able to sell more Windows 8 software, investors should consider four additional things when the company reports on January 24, 2013.
1) Intel (INTC) Warning
Intel lowered its revenue forecast to be in the range of $12.2 billion - $13.2 billion. The consensus was that the chip-maker would generate $12.9 billion. For 2013, Intel revised its revenue growth to be in the low single-digits. More importantly, gross margins will be 59%, helped by inventory cuts. In its fourth quarter of 2012, PC sales declined 6% year-over-year. Notebook volume increased by 2%, while the average selling prices for notebook chips declined by 6%. Desktop volumes declined by 5% as average selling prices rose by 4%.
Unsurprisingly, Intel's revenue grew on the server side, as its Data Center Group reported a 6% rise in revenue. This bodes well for Microsoft: SQL Server 2012, Office, and SharePoint software should continue to offset lighter Windows 8 sales.
2) Windows 8 Surface Pro
The innovative keyboard design for Microsoft's Surface RT failed to generate strong initial sales. The inability for RT to run Windows software added confusion to Microsoft's user-base. When the Pro is released in late-January, high-pricing could limit sales. The tablet is expected to cost over $1000 (with the keyboard accessory included). Microsoft could win over some business users, but consumers will continue to look at less expensive Apple (AAPL) iPads/mini and Android tablets as alternatives.
3) XBOX Successor
Microsoft teased its audience at CES 2013 with a proof-of concept system that could be part of the next-generation Xbox console. A combination of IllumiRoom and Kinect would ensure strong console sales when the Xbox is finally released. Shares of Microsoft could rise, ahead of E3 2013, which takes place between June 11 and June 13 2013. The company could announce the Xbox 720 at that event.
4) Windows 8 Price Increase
Microsoft's greatest short-term challenge was to encourage Windows 7 and XP PC users to upgrade to Windows 8. Even though Windows 8 runs more efficiently, has better performance, uses less memory, and has improved security, the upgrade is still viewed as tailoring to touchscreen. Until hardware manufacturers release touchscreen Ultrabooks at lower prices, consumers will still choose inexpensive tablets as replacements for computers.
The weight of a weak PC outlook may keep Microsoft shares within its current narrow range. Windows 8 was not the catalyst that investors hoped would help the company break the mid-$20 range that began in 2001. If 2013 is another year of transition, investors should not expect Microsoft to trade above $30, but excitement over a new Xbox could change that view. Combined with rising relevance of Bing in Facebook (FB) and on the web, investors are buying Microsoft at a forward P/E of just 9, while getting paid a yield of 3.4%. The odds are good that the company will provide a steady return while the company searches for ways to find its place in the mobile and tablet space.