Microsoft Climbs Upwards on Bing Optimism?

Reading Goldman Sachs' new rating of Microsoft (MSFT) from the Buy status to the Conviction Buy status makes one wonder if Bing is really all that much different than Live. Live was the company's previous attempt to get search traffic away from Google (GOOG), while Bing is the company's latest. Goldman feels a price target of $29 a share is realistic with the stock currently at $24.07 a share after a 2.5% increase Friday.

Expensive Price?

The stock has had a very nice run from near $17 a share to the current price over the past three months. At its current level, the price to earnings ratio is almost 14 with the company expected to earn 8.6% less this year than the prior year and 5.8% more next year. Thus making the stock expensive, unless you strongly feel the income will improve before the final earnings numbers are released. Yet the majority of analysts have dropped their expectations for the current quarter and the year over the past 90 days.

Windows 7

The excitement over Windows 7 is well deserved and is more than likely the catalyst for the recent movement higher. Reading the company’s most recent 10Q report, Online services is a very small part of the company that is still losing money. While Client, Server and Tools, and the Business Division make up most of the company’s profit. Client, which includes Windows, has fallen 16% over the past year. So a boost in this category would have a significant reflection in the earnings.

The Trade

Wait for a pullback in the stock if you feel there will be additional appreciation going into the release of the newest Windows operating system.

Comments

[ERCaptain:]

A look at the historical PE of MSFT would show that they have hit at least a 19 every year including '08. If we don't include '08 the "lowest high" would have been a PE of 25. There are 31 analysts offering coverage of MSFT and the most pessimistic says that they will earn $1.61 in the next fiscal year. That puts them at a price target of $30.59 to $40.25, at least a 29% increase over current trading price ($23.69). This is a stock picker opportunity.
Goldman has probably moved MSFT to the conviction buy list because in the first two weeks BING has gone to about 12% of the market share for searches. That was a 50% increase over what they have had from their previous efforts.
That should help them beat the most negative outlook available. And if they look good under the worst outlook, I think what BING adds to earnings will be icing on the cake.
BTW from Goldman today:
"It is a fertile environment for stock picking ... stockpicking will triumph," Goldman Sachs Asset Management (GSAM)Client Portfolio Manager Kathryn Koch told reporters inFrankfurt, Germany's financial capital, on Monday.
Koch has Microsoft in her top 10.

Jun 22 10:04 AM

[ERCaptain:]

And I agree with the author to buy on the pullback...


On Jun 22 10:04 AM ERCaptain wrote:

> A look at the historical PE of MSFT would show that they have hit
> at least a 19 every year including '08. If we don't include '08 the
> "lowest high" would have been a PE of 25. There are 31 analysts offering
> coverage of MSFT and the most pessimistic says that they will earn
> $1.61 in the next fiscal year. That puts them at a price target of
> $30.59 to $40.25, at least a 29% increase over current trading price
> ($23.69). This is a stock picker opportunity.
> Goldman has probably moved MSFT to the conviction buy list because
> in the first two weeks BING has gone to about 12% of the market share
> for searches. That was a 50% increase over what they have had from
> their previous efforts.
> That should help them beat the most negative outlook available. And
> if they look good under the worst outlook, I think what BING adds
> to earnings will be icing on the cake.
> BTW from Goldman today:
> "It is a fertile environment for stock picking ... stockpicking will
> triumph," Goldman Sachs Asset Management (seekingalpha.com/symbo...
> Portfolio Manager Kathryn Koch told reporters inFrankfurt, Germany's
> financial capital, on Monday.
> Koch has Microsoft in her top 10.

Jun 22 10:05 AM

[Old Trader:]

An honest question, if I may? Is Bing enough to "move the needle" on MSFT? I'd think the reception Windows 7 receives would be more of a driver for their earnings.

Jun 22 10:19 AM

[ERCaptain:]

On Jun 22 10:19 AM Old Trader wrote:
> An honest question, if I may? Is Bing enough to "move the needle"

You know, that is a good question. I would also like to see it enumerated...
See the following pulled from one analyst
"Microsoft given the significant search competition
and the overwhelming user preference for and brand
awareness of its competition, this is a positive step.
Microsoft has lost around $2 billion over the past year
on its search business, and while we don't expect
much market share shift, we believe this could
provide advertisers a reason for a second look at
Microsoft in terms of search."

Jun 22 10:31 AM

[Tim Hiteshew:]

Project Natal, the full motion controller for the XBOX may prove to be a large revenue generator when it is released.

Bing has a substantial amount of work to do before it takes market share away from Google, even if it does have superior technology.

Jun 22 03:13 PM