Microsoft: Why This Dark Horse Can Soar On New Products

| About: Microsoft Corporation (MSFT)

The trouble with holding the largest place for decades in any industry is that investors tend to take the stock for granted and get bored. This seems to be the problem which has plagued Microsoft (NASDAQ:MSFT) for a while now, as it plods along beside the glowing headlines for the newest product release from Apple (NASDAQ:AAPL), or the successful battle of Google's (NASDAQ:GOOG) Android system to take the top position in the smartphone market.

Meanwhile, from Microsoft, there never seems to be any news worth reporting. In recent months phrases like "elephant bone yard" and "indifferent" have been tossed out by stock analysts when discussing Microsoft. However, in the article, I argue that this company is the "dark horse" of the tech world that's ready to soar on new products.

With the recent blockbuster earnings report by Apple in the wake of its new versions of the iPhone and iPad ($12.30 earnings per share on $39.19 billion of revenue), it's now time to see just how Microsoft will respond. That response started out pretty well last week, and looks to gain a great deal of momentum in the next few months.

Microsoft Beats Earnings Expectations

Last week Microsoft announced its third quarter earnings (with a fiscal year end of June 30th). While not on the same level as Apple's earnings, it still surprised much of the investment community by coming out ahead of expectations. The tech giant reported earnings of $.60 per share on revenue of $17.4 billion, beating Wall Street predictions by $.02 per share.

Perhaps just as important for its future outlook, Microsoft also has trimmed down its expense forecast for the year, indicating a focused effort to shed some of the "bloat" that perpetually dogs larger corporations. The forecast for expense came in at the $28.5 billion range, which put it below the $28.7 billion range for its last expense forecast.

The earnings report was good, but it certainly was not spectacular. While the market did not react with wild celebration, it did not completely ignore the announcement either, boosting Microsoft's stock up a couple of dollars to around $32 per share.

While Apple is riding a very high wave with its iPad and iPhone, I think Microsoft is still the better bet at the moment for the investment dollar. At its base, it has more diversification for its revenue streams than Apple does, and recently added a telecommunications revenue line with its acquisition of Skype in October, 2011. With this new acquisition, Microsoft now has five related, high-revenue generating lines of business. In calendar year 2012, it is looking to release two potential blockbusters of its own, and possibly add another line of business to its book of revenue with its own tablet.

Multiple Product Launches Will Boost Revenue

In November, 2012, Microsoft will be undoubtedly giving a big boost to the revenue generated from its entertainment division. Already in possession of one of the favorite gaming systems on the market with its Xbox product, Microsoft will be releasing the much anticipated "Halo 4" just in time for the holidays. The Halo trilogy was wildly popular in the international gaming community, and its prequel, "Halo: Reach," released in September 2010, raked in $200 million in the first 24 hours after its debut.

At the same time, Microsoft is preparing to launch its newest version of its operating system, Windows 8. While Windows 7 was a success, Windows 8 is aimed at becoming the standard operating system for all devices: desktop computers, notebooks, tablets and smartphones. Microsoft has long experience on establishing an industry standard, and has a leg up on Apple in that it can license its operating system to any manufacturer.

While Windows 8 sits on top of the basic Windows, which may be a good or bad thing from a technological viewpoint, it's user interface with its new navigation tiles and ability to "pin" items to the tiles, has a slick look and is very user friendly. Even the former Apple engineering guru Steve Wozniak had words of praise for the new operating system, stating that it is easy to use and "beautiful," and summarizing his assessment with, "compared to Android, there is no contest."

If Windows 8 can indeed be one operating system for all devices, Microsoft may once again have delivered the next, huge step in technological advance to the industry. It's also very interesting to note the highly controversial comments Apple's CEO, Tim Cook, made about Windows 8. Basically sticking to the theme that it's too functionally compromising to converge personal computers and tablets, he stated, "You can converge a toaster and a refrigerator, but you know those things are probably not going to be pleasing to the user."

Mr. Woods' comments, clearly aimed at both Windows 8 and Android's introduction of full keyboards for its tablets, may have been meant to downplay the competition, but does not jive with Apple's own strategy. Most of the updates for the operating system Apple uses on its Macs (OS X) have made it look more and more like the operating system being used on the iPhone and iPad (iOS). Apple may well be trying to move to exactly where Microsoft 8 has already arrived.

Agreements to Produce Smartphones and Tablets

In addition to promoting Skype, and launching both Halo and Windows 8, Microsoft is looking to produce a new smartphone based on the Windows 8 operating system. Verizon (NYSE:VZ) and AT&T (NYSE:T), the two biggest domestic cellular service carriers, are reportedly tired of Apple's tight control over the price, design and additional apps for its iPhone and iPad. In the last thirty days, both have indicated they will be making a strong push for the smartphones with a Windows 8 platform.

With its solid marketing network and huge customer base, developing a marketing preference for (steering customers toward) a new smartphone featuring Windows 8 would be a real boost up into a market that has so far eluded Microsoft. A Microsoft-Verizon-AT&T partnership should also be worrisome for Google and its Android operating system for smartphones and tablets.

Along with its potentially significant grab for a big share of the smartphone market, Microsoft is also making strategic moves and agreements to break into the tablet market in a big way. Intel has reported it is in discussion with "at least" ten tablet makers to produce a tablet which is run on the Windows 8 platform. This shows a startling, industry consensus to take on Apple in a head-to-head competition in the tablet market.

The other growing sector in these types of business lines is cloud computing. As it stands now, Apple (with its iCloud), Google (with its Google drive), and Microsoft (with its Skydrive) are all on pretty even footing. While Apple has the more prevalent and popular products for access to cloud computing in the iPhone and iPad, it has the same issue which has dogged Apple for decades: you have to have an Apple product to access it. Microsoft has the capability to offer consumers much more choice in their selection of devices to access their cloud storage. In addition, and unlike Windows 7, Windows 8 is reported to have solid and deep integration and functionality with Microsoft's Skydrive service for cloud computing.

Microsoft is currently trading around $32 per share, on a volume of 44,860,000. On top of all the new avenues Microsoft will be pursuing in the next fiscal year, it also will be offering an upgraded version of its Microsoft Office products and Server Tools.

There is so much movement scheduled by Microsoft for the next year, with much of it a sure-fire winner (Halo and a Microsoft Office upgrade), and the rest with huge potential (Windows 8, the Verizon/AT&T partnership, and large interest in Windows 8 tablet production), that it seems a good investment, and one which has the good possibility of taking off into the stratosphere.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

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