Microsoft's Steve Ballmer Has One More Chance For A Home Run

Nov.30.11 | About: Microsoft Corporation (MSFT)

Liberate Xbox. Liberate Kinect.

At minimum create a tracking stock, like that for EMC's VMWare VMW (VMW).

Microsoft (MSFT) shares will always be weighed-down by the volume, and outlook, of Microsoft Windows. The business is too big for it to be otherwise. Even if Windows 8 turns out to be the greatest thing since sliced cheese, it won't move investors to bid up Microsoft shares past $30. The PCs that Windows run on look doomed, as an industry, and the server business makes you just-another enterprise play.

Ah, but Xbox, And Kinect. That's a different story.

During Microsoft's most recent quarter sales for the gaming platform rose 30%. says Xbox bundles were the third and fourth hottest electronic products on Black Friday, passing the Wii and leaving Sony's Playstation in the dust. They were spurred on by a $99 deal on Kinect.

What's more, rumors about the next version of Kinect are getting the kind of play once reserved for the iPhone. The Kinect 2 will be able to read lips and sense your mood, thanks to a higher resolution camera, better software, and faster networking connections.

Cool! Or (ahem) kewl!

Trefis now calls Xbox the leading game platform, thanks to Kinect, and predicts that the launch of a Kinect Software Development Kit (SDK) for Windows 8 will only lead to more increases in market share. The bad news is at the end of the Trefis comment, which notes that Kinect, Xbox and Windows Phone (meh) together represent just 10% of the company's revenue.

Look. VMWare represents just 20% of the business of EMC. It has a market cap of $39 billion, against the parent's $45 billion. Yet EMC still owns 80% of VMWare. Investors, some of sound mind, are willing to pay a PE of 62 for those VMWare earnings, nearly three times the 22 multiple given the parent.

A tracking stock for Microsoft gaming (I'm sure NASDAQ has the symbol XBOX available), with 20% of its equity, could easily draw 30% of the value of the parent or more, due to its better growth prospects. Plus a PE that would put Google's (NASDAQ:GOOG) to shame. Microsoft's own PE is currently around 9. People are buying it for the 3.22% yield, while IBM gets a PE of 14 on a yield of 1.65%.

This is the biggest no-brainer in the history of Earth. It may be CEO Steve Ballmer's last chance to hit a home run for investors. Or he can go down in history as Microsoft's John Akers.

His choice.

Disclosure: Long IBM