How Investors Should React To The Windows 9 Preview

Aug.18.14 | About: Microsoft Corporation (MSFT)

Summary

According to industry insiders a Windows 9 preview event will occur in the next two months.

The Windows 9 preview event will confirm speculation over "One Microsoft." Basically a united ecosystem between mobile, console and desktop/laptop.

Windows 9 may reverse projections of declining desktop/laptop shipments, which has obvious ecosystem benefits to upstream suppliers and downstream OEMs.

Rumors are circulating of a Windows 9 preview that is set to be launched in the next couple months. This is pretty important because it communicates to investors how well Microsoft (NASDAQ:MSFT) can navigate the consumer side of its business.

Based on past reports, people believe project Threshold will unite the Microsoft ecosystem, based on comments from Satya Nadella. Assuming the new OS delivers on this one fact, we can view Windows 9 as a positive earnings catalyst. However if it's just a basic update/patch to the user experience, paired with some minor security improvements, the September/October preview event will do little to move the stock price.

The importance of delivering an actual ecosystem is real. Microsoft's various products don't work very well together across mobile, tablet and desktop. With the vast majority of Microsoft's installed base being PC-owners, Microsoft needs to deliver on more seamless integration between the various form factors, beyond improvements to the metro layout. A stronger ecosystem can drive sales in its Nokia device division, while boosting mobile app development.

Windows 9 is expected to integrate Cortana (Microsoft's digital assistant), and come equipped with a user interface that's reminiscent of Windows 7, with some aspects of Metro in the start menu. The Metro layout is much more effective on mobile and tablet devices, versus desktop. Apple decided against making the Mac OS user interface the same as iOS as Apple anticipated that the two layouts should be different. Somehow Microsoft thought it would be a good idea to standardize metro across desktop and mobile.

Microsoft's devices and consumer licensing business (Windows licenses for consumer) generated $19.021 billion in revenue in the trailing 12-month period. The segment generated 24.4% of Microsoft's sales, and assuming Windows 9 generates better licensing volume, the impact could be material to shareholders.

Gartner forecasts that desktop/laptop shipments will decline by 35 million over the next three years. Therefore, Windows 9 needs to offer some really compelling features beyond what was mentioned earlier in the article. Otherwise, Microsoft could will milk profits from a declining product category. Which is OK, but I think every analyst/investor would prefer a growing consumer licensing business over the next three years.

Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.