Microsoft’s (NASDAQ:MSFT) Windows 8 could be single most important factor to the company’s revenue next year. This division has been flagging lately and posted a 2% decline in the recent earnings announcement while the rest of its businesses including the Business division and its Server & Tools and the Entertainment and Devices division reported solid revenue growth. Since Windows contributes nearly 25% to our valuation for Microsoft, any drop in revenue has direct impact on the stock’s value. The company scored big with Windows 7 following the Vista debacle, and it now looks like Windows 8 could be the next catalyst to boost some life in the stock. Microsoft’s only major competitor in the operating system space is Apple (NASDAQ:AAPL).
We have a $28 Trefis price estimate for Microsoft, which implies around 5% upside to the current market price.
Can Windows 8 Come to the Rescue?
Microsoft sold over 400 million copies of Windows 7 since it launched and the sales continue to be strong. However, it is now almost 2 years old and so we expect the sales to slow down significantly in the next couple of quarters. This means the company will rely on new businesses to drive growth in the coming quarter.
Is Windows 8 up to the task?
Microsoft demoed Windows 8 earlier this year, which will come with a completely new user interface inspired by the ‘Tiles’ interface on Windows Phone 7. One of the key features is that it will support both computers and tablets. While the PC market is still much larger than the tablet market, the growth in the PC industry has slowed down considerably as consumers shift to smartphones and tablets. Global tablet shipments have been picking up every quarter with more than 15 million shipments in Q2 2011 alone.
With Windows 8, Microsoft hopes to capture a large share of the still nascent tablet market, which is largely dominated by Apple. As consumers are accustomed to Windows on their PCs, they would likely embrace Windows 8 on their tablets as well especially if they can use the same applications and software on their PC and tablet.
Assuming that this Windows 8 can successfully integrate the tablet and PC operating systems, Microsoft could potentially sell much more than the 400 million licenses Windows 7 has sold since it will serve a much larger PC and tablet market in addition to giving enterprises – that are largely Windows dependent – an easier option for tablets versus switching to Apple.