The Great Vista-Inspired PC Boom?

| About: Microsoft Corporation (MSFT)

A few weeks ago, we sent to subscribers a warning that all is not well in techland, especially with Microsoft (NASDAQ:MSFT). It is now published on the blog, Looking at Technology: Caution is Warranted.

That view turns out to be confirmed by one Steven Ballmer, the CEO of Microsoft. This past week, he "gathered together a group of analysts who cover that software colossus to fill them in on the recent debut of its new version of Windows, dubbed Vista, and what the future holds in store for it and his company."

Alan Abelson addressed this very issue in the latest Barron's. He notes that:

Money, it turns out, can buy everything -- except a boffo launch of a new software product. The electronic retailers primed to accommodate hordes hungry for Vista banging on their doors too often, instead, found the thin ranks of their sales help outnumbering those of their customers. Kind of like throwing a party and the guests all show up disguised as invisible people.

Much of the big move off the lows in MSFT were based on the upgrade cycle in Vista - one that turns out to be noticeably absent from the sales data:

Now, we don't want to give you the impression that Vista has been a total dud. It hasn't been, except in terms of living up to extraordinarily extravagant expectations whipped up by all the hoopla. Despite the eerily muted opening day (all the noise pretty much was supplied by the company's poobahs and their subalterns), sales should gradually gather strength as this year rolls on and next year, as well. But, pure and simple, it grieves us to say, Vista doesn't stack up as the mighty blockbuster investors and geeks alike supposedly had been panting for.

A few other factors worth noting: Mr. Ballmer cautioned against anyone out there being "somewhat too bullish." He was distinctly wary that Vista might trigger a new PC boom. For those who like to argue that sector rallies precede fundamental gains, pray tell what the lack of buoyancy in the stocks of HP (NYSE:HPQ), Dell (NASDAQ:DELL) and Intel (NASDAQ:INTC) suggest as to the Vista adaption cycle?

Abelson goes on to quote from the very skeptical Fred Hickey as to what we should expect from the rest of Tech:

Fred Hickey, proprietor of the High-Tech Strategist and treasured Roundtable member, had very low expectations for Vista and, as far as he's concerned, they've already been fully met. As is not uncommon with Fred, he put his money where his mouth is, buying put options on Microsoft ahead of the product's splashy introduction, and has the profits to prove it.

We chatted with Fred on Friday, and he remains very much of a mind, as he wrote earlier this month in his newsletter, that Vista is "not an epic disaster for Microsoft" because "ultimately, businesses and consumers will resume their regular upgrade patterns and buy PCs that come pre-loaded with Vista." However, he's convinced its effect on the "PC food chain" stacks up as another and very much sadder story.

Spurred in part by a study commissioned by Microsoft that concluded Vista would generate $72 billion in related hardware, software and service revenue, Fred relates, what he calls the PC food chain -- distributors, resellers and solutions providers -- went wild and hugely overbuilt in preparation for a post-Vista release boom that is clearly not coming.

The result, sighs Fred, is that through the length and breadth of the industry, from semiconductor companies to electronic retailers, there has been a massive inventory build-up -- which, he contends, is a prelude to a disaster. He suspects that the first tremors of real trouble will be felt a few weeks hence, when some dismal earnings forecasts begin to seep out.

What confounds him and could greatly exacerbate a collapse in techs is that investors continue to be bullish on them despite six long years of underperformance by the sector. Besides Microsoft, his most recent published list of stocks he's negative on includes Best Buy (NYSE:BBY), CDW (CDWC), SanDisk (SNDK), Texas Instruments (NYSE:TXN), Lam Research (NASDAQ:LRCX), KLA-Tencor (NASDAQ:KLAC), Nvidia (NASDAQ:NVDA), Research in Motion (RIMM), Apple (NASDAQ:AAPL), Microchip Technology (NASDAQ:MCHP), STMicroelectronics (NYSE:STM), (NASDAQ:AMZN), International Rectifier (NYSE:IRF), Dell (DELL), Novellus Systems (NVLS), Xilinx (NASDAQ:XLNX), Motorola (MOT), Applied Materials (NASDAQ:AMAT), NetLogic Microsystems (NASDAQ:NETL) and Fairchild Semiconductor (FCS).



Goldilocks in Drag
Barron's February 19, 2007

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