When Google (GOOG) surpassed Microsoft (MSFT) by market capitalization on October 3 intra-day, it marked another achievement for a competitor. It also represented yet another sore spot for Microsoft. After Apple (AAPL) surpassed Microsoft in size, Apple shares never looked back. Apple now has a market capitalization of $616.92 billion, compared to Microsoft's $248.65 billion Google has a P/E of 22.4 and a price/sales ratio of 5.77. Microsoft has a P/E of 14.83 and a price/sales ratio of 3.35. Investor sentiment is clearly more positive for Google, and less-so for Microsoft. The divergence is nothing new: Google dominates in search, is growing its social media initiative rapidly (through Google+), and dominates in the mobile space through the Android system. Microsoft still relies on most of its profits from corporate server software and PC's. After being range-bound for 12 years, will the impending release of Windows Phone 8 for smartphones and Windows 8 for desktops finally support a higher share price?
A breakout in shares of Microsoft will depend on a number of catalysts.
1) PC Demand Overseas
A boost in PC sales would boost Microsoft shares, but weak global economies will continue to constrain demand.
The PC market is no longer in a growth phase, thanks to a rise in the popularity of smartphones, and the growth of Apple's iPad tablet. PC sales growth now relies on the overseas market, notably demand in China. The slowing growth in China should be expected to continue. Intel (INTC) confirmed weak demand when it lowered its revenue forecast for the year. Still, a monetary stimulus and a boost in infrastructure spending will likely help growth in China, albeit not until later this year.
2) Windows Phone 8
The Windows Phone 8 launch will be a positive catalyst for Microsoft shares.
Microsoft introduced a number of innovative features for Windows Phone 8 ("WP8"), a move that will benefit its hardware partner, Nokia (NOK). Set to launch at the end of this month, Microsoft has not yet released an SDK (Software Development Kit) of WP8 to its developers. From what is known, the SDK will give developers an option for tracking data usage, support Skype integration, and will not have Zune. The SDK will also include access to Xbox Music, enabling integration between mobile devices and the entertainment console.
The Nokia Lumia 920 and 820 were priced in Germany and Italy at $836 and $643 respectively. The high price may weaken initial sales, but all devices start at high price that early adaptors are willing to pay. Over time, the price will drop, which will help WP8 sales.
3) Windows 8
Positive reviews for the Windows 8 operating system, along with an inexpensive upgrade offer for consumers buying Windows 7-based machines today will be a positive catalyst for Microsoft shares. Microsoft is expected to announce the launch on October 25, 2012 in New York.
4) Windows 8 Surface Tablet
The Surface tablet is not expected to be a positive catalyst for Microsoft shares. Microsoft announced that the Surface tablet will be sold across Canada starting October 26. The Windows RT release is expected to cost $399, while an Intel-based Surface tablet will sell for $799 next year.
The Windows 8 software refresh stretches from mobile device to desktop. Shareholders who waited for Microsoft to break-out might finally be rewarded. In addition, Microsoft will also be releasing Office 2013, an unappreciated but profitable product. On the entertainment side, Halo 4 will be released in November. Google and Apple may have leapt ahead, but the upside for Microsoft is only beginning.
Disclosure: I have no positions in any stocks mentioned, but may initiate a long position in NOK over the next 72 hours.