Five Stocks For The Microsoft Vista Cycle

From The Cody Report: As Vista finally comes over the vista [oh, man, was that one too obvious?], there’s a whole new PC upgrade cycle about to kick in. The market’s seen these types of PC upgrade cycles in the past, back in the 1990s. The first concept of the upgrade cycle came as Microsoft (MSFT) rolled out Windows 3.1 in 1992.

Take a look at how some of the biggest PC-related stocks traded into that cycle:

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That concept became a full-blown phenomenon in 1995 when Windows 95 took the PC out of the stone age and into the current paradigm of how we interact with the computer [via mouse and keyboard] and how we use different software applications to divvy up our tasks on the computer.

Again, almost any PC-related stock took off into that cycle:

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And that 1995 cycle, which really did change the world in so many economic, social, and productivity ways that we’ll never fully recognize, was followed up with yet another major overhaul to the PC-system, this one coming in 1998, as Windows 98 rolled out into a developing tech bubble, the entire installed PC base upgraded their systems:

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As the tech bubble inflated to historic – and unsustainable – proportion, Microsoft tried to push through one final upgrade cycle, from 1998 to 2000. The difference between those two operating systems is minimal though, and the installed PC-user base saw little reason to spend another couple grand to replace a system they’d spent a couple grand on just a couple years before which had been a system they’d spent a couple grand on to replace their most-likely original system.

With a tech, dot-com and telecom bubble popping underneath it, PC-related stocks didn’t do too well that time around either:

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In the aftermath of that dot com bubble, Microsoft rolled out another incremental upgrade to the Windows platform which, if you’re reading this program on a non-Apple computer, you’re reading this newsletter on that operating system called XP. XP extended the Windows 2000 upgrade cycle such that users from 2000 and 98 both eventually moved to XP, but over a slow, eight-year cycle.

PC-Related stocks have been range bound since that 1998 roll out:

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And here we find ourselves today, with Microsoft rolling out a new operating system -- a major new upgraded operating system, much like the 1995 paradigm shifting Windows 95. But after the Street was burned the last two times through the Windows upgrade cycle, nobody thinks that this cycle will spur a major upgrade cycle from the installed PC-user base. They’re wrong. New dual processor, 64-bit chips from Intel (INTC) and Advanced Micro Devices (AMD) will combine with the video-, voice- and network-centric Vista software operating system and a just-passed tipping point of hundreds of millions of broadband users to spur a major upgrade cycle. And similar to how those PC-related stocks rallied and rallied hard back in those past major upgrade cycles, so too should we expect to see some big moves this time around.

Here are five to watch:

Nvidia (NVDA) :Nvidia’s graphics chips have enabled the amazing video and other graphics that we take for granted in this computer age. The company’s in a particular sweet spot this time around, as their biggest competitor, ATI, is at least a couple quarters behind Nvidia in rolling out the next gen Vista-optimized graphics chips. AMD recently bought ATI, but Nvidia’s graphics solutions are so good that even AMD is giving them more business into this cycle. That said, the management here is part of the crowd who misled investors about corporate pay through changing option grant dates and prices for executives without telling investors. I continue to call for the SEC, IRS and Justice Department to prosecute the individuals responsible for each of these scams, and I won’t buy stocks whose managements have lied to investors.

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Micron (MU) : Micron’s rightly been called a “flying pig” by pundits because the company plows so much capital into their business and shows so little profits and cash flows off those capital investments. Regardless, Micron’s sweetly positioned for big growth as Vista requires a ton of DRAM which is exactly where Micron dominates in this country.

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Intel: Despite being perhaps the most over-coveraged company in the history of Wall Street, Intel still gets no respect heading into this cycle. The company’s got new chipsets, new platforms for developers and a major new operating system to power up.

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AMD: For the first time ever, really, AMD finally got the best of Intel during the last couple years when AMD’s chips ran much cooler and more energy-efficiently than Intel’s. I think Intel’s got their mojo back, but this cycle will likely carry AMD’s fortunes and stock higher anyway.

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Corning (GLW): Corning’s set to benefit from this PC upgrade cycle in a way that it never has before. As all these new PCs with Vista are sold, displays will also undergo a new upgrade cycle of their own. Monitors – even LCD monitors from just a couple years ago – pale in comparison to the remarkable images that today’s flat panel and laptop PCs display. Corning’s glass substrates are dominant in these next gen displays and are set to boom during this boom.

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When a PC upgrade cycle kicks in and PC stocks lead the market, it's not brain surgery to find the names that will benefit. Vista rises over the vista indeed.

Disclosure: At the time of publication, the firm in which the author is a partner is long GOOG and MSFT

Comments

[Tom Mar:]

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Operator

Our next question comes from Munish Goyal.

Munish Goyal -

A couple of questions. It seems like you sound pretty positive about the PC-related DRAM supply/demand equation for the second half of the year. Yet, you are not investing or putting capital. Can you reconcile that for me? Why are you not putting capital for that?

Steve Appleton

Munish, it's not a matter of not putting capital. We're putting capital in, we're just not allocating it to produce that particular product. The answer is really pretty simple. Just look at the last seven years, there's only been one or two that have really been okay.

We're allocating the resources to products that we think are more differentiated and have a higher gross margin over a sustainable, longer period of time.

One thing that I think is worth noting is you can't go out and develop an image sensor customer or MCP customer where they have to design this product in months in advance or maybe a year in advance; finally get it to market and call them up and say sorry, we decided to make some PC DRAM instead. It just doesn’t work that way.

So we have commitments to make on these products as we build those businesses. As a result, we're going to allocate the resources to do that rather than just short-term change it.

Having said that, it's not that we won't benefit from an improving pricing environment for a product that goes into PCs because as Mike already stated, that's still a big part of our business and we will.

Our focus, as we’ve said now for several years, is to develop a more differentiated product. It's not to exit the PC space, it's to lessen our dependence on it and that's what we're trying to do.

Munish Goyal -

So, I guess the follow-up here is if as you said, out of the last seven years, there was one good year for PC-related DRAM, then why even be in this business or have such a large portion of your total business in PC-related DRAM? Why not shrink it to something more substantial? How do you think about that?

Steve Appleton

Well, we are shrinking it. As I said, it has continued to shrink for several years now. We're continuing on that path. So the other thing is, you say why make it at all? Well, we do have a lot of capacity in place and we do need scale, we need to continue to be cost competitive in our memory business in totality and that requires that you produce, I think, in all of these spaces.

It's not just as simple as cutting that all off and thinking that it solves all of the problems. It doesn't. You have to go through a transition and the intent and what we've been trying to achieve is go through that transition without damaging the Company in any particular quarter or 12-month period.

We're trying to keep a Company that's growing in the areas we want to grow, continues to make the use of efficiencies that we've learned and developed from the commodity DRAM business and keep that, by the way, knowledge base moving forward by participating in those markets. But leverage that into more differentiated product.

2006 Nov 28 07:01 AM