The next week should be an interesting one for investors of technology stocks. The launch of Microsoft's (MSFT) Windows 8 is one of the biggest events in the entire technology sector and is expected to have an impact on a number of stocks; especially the ones that fall in the Windows ecosystem. OEMs such as HP (HPQ) and Dell (DELL) are usually affected in any Windows launch. However, WP8 has made the list of launch stakeholders much longer and more diverse. The glass manufacturer Corning (GLW) and the Finnish telecom giant Nokia (NOK) are also closely linked to this major Windows launch. I have explained below why I believe each of these stocks will be impacted by this important Windows 8 launch.
Microsoft has become more of a dividend stock rather than the growth story of the late 90s. This is because, in the last 10 years, the company has given back more than $150 billion to the investors in the form of dividends and buybacks. MSFT is trading at a forward P/E of 8.7x and offers a dividend yield of 3.2% (which is much higher than the sector average of 1.9 %). In my opinion the PC OS industry has already hit its maturity. My opinion is backed by the fact that this is the only year in the last ten years that the PC industry has not shown growth. Therefore Microsoft has to look toward other avenues for growth in revenue in order to propel the stock price.
The lack of focus on smartphone/mobile OS was one of Microsoft's biggest mistakes. The software giant was focusing on Bing to compete with Google (GOOG), when it should have been developing a killer OS for handheld devices. However it seems the company is on its way to atone for this mistake with WP8; an excellent OS according to initial reviews. I am very bullish on WP8 prospects in handheld devices but it still remains to be seen how conventional PC users react to the touch interface of Windows 8. In the 1Q2013 earnings release, MSFT reported that it has certified more than 1000 devices for Windows 8 and has reported approximately $1.6 billion in unearned revenue (from pre-launch sales). As the company derives most of its revenue from its Windows segment, Windows 8 launch hype should have a positive impact. Therefore I believe MSFT will see a significant appreciation on the Windows 8 launch, which is going to take place on October 26.
The troubled PC maker has been the one to suffer the most with the fall in PC demand. The leader in PC OEM industry, HPQ fell to second place (behind Lenovo) this quarter according to Gartner data. HPQ generates more than 30% of its total revenue from PC sales and any positive news in the PC industry is expected to impact HP's stock price. The stock is expected to see appreciation on the Windows 8 launch. HPQ is currently trading at a forward PE of 4x. There is a lot of pent-up demand as consumers are holding off to buy their products until Windows is launched. As one of the leading manufacturers of Windows-based Desktops/Notebooks HPQ will seen a positive appreciation as the launch date approaches. Moreover, positive response to Windows 8 is expected to improve the valuations of HPQ because it is a major part of the Windows ecosystem.
The rise of Android and Apple (AAPL) had almost pushed NOK into the abyss to join other technology companies that have failed to evolve with their industries. In these troubled times, Microsoft has been a savior for Nokia. The software giant has given Nokia both positive publicity and financial assistance. I am bullish about a WP8-powered Lumia series and especially about Lumia 920 on AT&T (T). There were some positive takeaways from Nokia's 3rd-quarter earnings report, like less-than-expected cash burn and signs of improving operational efficiency. The stock is currently trading at a price close to the price of its patents per share; therefore I believe there is a significant upside to NOK. The stock is expected to move up during this week as investors wait for Nokia's first WP8 powered devices to hit the market. For short-term investors, any price close to $3 is a good point to take profits. This is because NOK has been fluctuating in range of $2-$3 during the last couple of months. Any news regarding solid Lumia sales figures will help the stock break this barrier.
The glass manufacturer is also expected to see an upside due to the Windows 8 launch. There are two reasons behind this upside; the company's primary business of LCD is expected to see an upside because there is a lot of pent-up demand in anticipation of Windows 8. If the launch is positive, PC sales are expected to improve considerably and GLW will benefit through its LCD segment; as this will increase demand and positively impact margins in this segment. In the long run, Windows 8's emphasis on touch screen user interface will increase demand for glass products that are more resistant to wear and tear. GLW, through its Gorilla Glass and Gorilla Glass 2, is expected to be a beneficiary in long-term scenario. The combination of these catalysts are expected to bring an upside for GLW which is trading at cheap valuations (Forward P/E 9.4x, NASDAQ P/E 15x).