Seeking Alpha
Long/short equity, contrarian, newsletter provider, research analyst
Profile| Send Message| ()  

By Neal Rau

Microsoft Corporation (MSFT) will be revealing the company's second generation Surface tablet during its upcoming media event on September 23. After the company's move to acquire Nokia's handset business, the company is also expected to introduce a Windows phone with a larger screen at some point in the near future, which sounds good, but the stock has pulled back from recent highs in July, and then it tested long-term support. Is this the time to buy shares of MSFT?

The new oversized Smartphone could be a very important product for Microsoft, as it will be the first Windows 8 Phone device with a screen larger than five inches. Samsung has taken market share from many hardware makers who were slow to act on the consumers demand for a larger Smartphone screen, including Apple, and Microsoft shares have easily outperformed Apple shares YTD, but that does not mean the stock looks attractive. According to the Stock Traders Daily trading report, Microsoft shares are trading just above support, after falling sharply from recent highs in early July, and because price matters to investors, that support level matters as well.

The real problem for Windows based phones is the lack of apps. Developers are less likely to create apps for phones with the Windows platform because they represent much less market share in the smartphone market. Google Inc's (GOOG) android, Apple Inc. (AAPL) and Amazon.com, Inc. (AMZN) with its Kindle, offer a much better app ecosystems. This issue could accelerate unless Microsoft starts selling more Windows based phones, or they start to develop their own apps for Windows phones.

Microsoft's Surface RT tablet has not been able to gain much market share in the tablet space either, which is also related to the lack of available apps. The Surface tablet was struggling so much that Microsoft was forced to slash the price by $150, bringing the price down to $350. Microsoft reportedly only took in about $853 million in Surface related revenue in fiscal year 2013, which started in July 2012. That is $47 less than the $900 million write-down the company recently took to offset the price reduction. The company also had a $1 billion marketing budget to advertise Windows 8 and the Surface tablet.

So far, Microsoft's Surface Pro has been a huge disappointment. If the next generation of the Surface tablet has any chance of succeeding, the company needs to address to numerous complaints about the current models battery life, as the current version only offers 4-5 hours until it shuts down. The next Surface Pro will reportedly run on Intel's Core i5 processer, more efficient processors, and the energy-efficient chips should address complaints about the current model's battery life.

Microsoft is already late to the game in the tablet space, and it certainly cannot afford to fall further behind. Many analysts are forecasting tablet unit sales to exceed laptop unit sales this holiday quarter, for the first time ever. The last Surface tablet priced at $500 was an obvious mistake. Microsoft will probably look to sacrifice margins with a lower price point, in order to gain market share this time around. Tablet sales matter, even to a giant like Microsoft, so investors will be watching when the next generation of tablet Surfaces.

Based on the real time trading report published by Stock Traders Daily, we buy when support is tested. MSFT tested long-term support in early September, and support is holding so far. As long as the stock remains above support, our report tells us to expect higher levels and a test of resistance, but support also acts as our risk control. If support breaks lower, the otherwise positive bias that exists now based on the test of support, would reverse. Treat support as inflection accordingly.

Source: Microsft Shares Poised To Increase