Why I'm Buying Microsoft This Morning (MSFT)

Apr.28.06 | About: Microsoft Corporation (MSFT)

I’ve submitted an order to purchase 1000 shares of Microsoft Corporation (NASDAQ:MSFT) at $25. Microsoft is down more than 6% to $25.59 in after hours trading after the company reported an increase in 3rd quarter profit but fell short of analyst expectations (see full conference call transcript).

From an AP article discussing Microsoft’s results:

For the three months ended March 31, the Redmond software maker reported earnings of $2.98 billion, or 29 cents per share, compared with $2.56 billion, or 23 cents per share, in the same period a year earlier.

Analysts polled by Thomson Financial were expecting earnings of 33 cents per share, on revenue of $11.04 billion.

For the current fourth quarter ending June 30, Microsoft said it expects to earn 30 cents per share, below the 34 cents per share that analysts had been predicting.

Microsoft’s results are inline with my own expectations. I believe the drop in anticipated revenue for the fourth quarter ending June 30th is a result of upgrade jitters as consumers wait to spend their money on Windows Vista and Vista-optimized application software. The company delayed the release of Windows Vista until early 2007.

I believe the current drop in price creates a valuable long-term purchasing opportunity. Short timeframe minded investors will seek to place their money in alternative technology investments that appear to be safer and faster growing than Microsoft. For me, what could be safer than investing in the world’s largest software company?

The timing for the drop in price in Microsoft shares couldn’t be better. Here’s why:

* The XBOX 360 console is enjoying strong demand and retail stores are only starting to carry ample stock.
* Revenue opportunity for the XBOX LIVE service for the XBOX 360 hasn’t been fully realized.
* Sony Corporation (NYSE:SNE) has delayed the release of its Playstation 3 console to the first half of November. The Sony console was originally set to be released spring 2006.
* Vista is the company’s first OS update in over 4 years since Windows XP. How quickly people forget the long-term revenue impact Windows XP had...
* Investors are underscoring the importance of the technological upgrade. Vista will create cross-selling opportunities for Microsoft’s application software. For example, due to improvements in the WDM, Windows Display Driver Model, and Direct X 10, Microsoft Office can contain front-end optimizations never found in any Windows application, instead of a bulk of back-end improvements that I believe the majority of small business and personal users don’t use.
* Speculation is rampant for Google Inc. (NASDAQ:GOOG), which I consider a competitor to Microsoft. Any problems with Google should drive investors to look for more solidly established software companies such as Microsoft.
* The drop in MSFT follows major drops in Intel Corporation (NASDAQ:INTC) and Dell, Inc. (NASDAQ:DELL), suggesting an overflow of cyclical fear from slow PC sales that I believe are only temporary.

I initially had some doubt in Microsoft due to unknown demand for the recently released XBOX 360. Now that demand for the console is strong, I have renewed interest in the stock.

I believe it will be easy to earn a 20% or greater return on MSFT shares in the next year as we approach the release date of Vista. Improvements in INTC and DELL should help fuel interest in MSFT shares.

MSFT 1-yr chart: