Microsoft Launches Windows 8 And Surface; Stock Has 30% Upside Potential

| About: Microsoft Corporation (MSFT)

Microsoft (NASDAQ:MSFT) launched its much-awaited hardware device last week, the Surface RT, a tablet that runs on the latest version of Microsoft's flagship operating system Windows RT. Microsoft packed the new Windows with touch-screen capabilities, gave it a new look and feel and ensured that it's compatible with some popular apps.

The company also launched Windows 8 last week, which is the most innovative overhaul of the operating system since 1995. Windows 8 will run on Intel processors, and run applications developed for Windows 7. Windows RT is similar, but runs on lower-powered ARM processors used in mobile phones and many tablets. It will support lighter, thinner and cheaper devices than Windows 8. But unlike Windows 8, it won't run applications developed for Windows 7. Microsoft has offered a message with the launch of Windows 8 that provides compelling reasons to consider Windows as a platform and ecosystem.

Windows 8, Windows RT And Surface RT: A Total System Oriented Approach

The touch-screen oriented Windows 8 system is designed to run on PCs, tablets and mobile phones. The new operating system does away with the familiar start button and replaces it with a start screen that features brightly colored tiles that display live information.

Through 2015, 90% of enterprises will bypass broad-scale deployment of Windows 8, Gartner predicts. Windows 8 is Microsoft's attempt to bring the touch interface to its flagship product to counter gains by Apple (NASDAQ:AAPL) in rapid-growth markets. Microsoft had to make this change to modernize its offering, and its approach is to push IT organizations to this new interface as quickly as possible. This move by Microsoft will slowly and steadily help the company regain its no. 1 position in the OS market, particularly when smartphones and tablets are fast replacing the PCs even for the corporate users.

Microsoft's latest operating system is expected to capture a significant share of the corporate world in the long run. While Apple's goal is to offer premium products to its customers that are basically non-corporate or personal users, Microsoft is emphasizing more on the corporate sector. The company is focusing to capitalize on its Windows OS to grab the center stage in the tablets market by targeting the IT organizations.

Microsoft Surface: Designed To Revive Interest In PCs Through Tablets

According to Goldman Sachs, tablets will replace one in every three PCs in 2011. That forecast was made in December 2010. Back then, Goldman predicted Apple would sell only 37 million iPad tablets in 2011. Today, those estimates are north of 55 million -- 50% higher than the original forecast.

Launching the hardware device and the operating system software just before the holiday buying season is a tactical and clever move by Microsoft. They know very well this is the time to connect the company with the tablet users. When you buy a Surface, you've to get accustomed with Windows RT. Microsoft is relying on the new operating system to revive interest in the personal computer and carve out a position for Windows in the tablets market, which is fast picking up.

"Microsoft is all in to make Windows 8 vision a reality: Office, Bing, IE, MSN, SkyDrive, Skype, Xbox Music, Video and Games", says Microsoft CEO Steve Ballmer. He continues to add, "With Windows 8, we've brought together the best of both worlds. The PC and the tablet. Your work life and your home life."

How Does Microsoft's Surface Stack Up Against Apple's iPad

The lack of a broad range of games, tools and other downloadable software will detract Surface in a head-to-head comparison against the iPad and its plethora of more than 275,000 apps. But that will only be a short-term incident.

Microsoft has had a lot of interest in writing for the operating system and has had to add staff and computers to process and approve the submissions, Antoine Leblond, the vice president in charge of the Windows app store, said in an interview. Because apps written for the program can be sold not just to tablet users but to hundreds of millions of customers who will get Windows 8 on personal computers, Microsoft has a chance to win over more developers, Leblond said.

"Microsoft feels pretty strongly that the platform they have built is compelling to both users and developers," said Wes Miller, an analyst at Directions on Microsoft in Kirkland, Washington. Miller's own examination of the Windows app store indicates there were 7,873 apps worldwide earlier this week, with hundreds being added daily. (Source: Bloomberg)

How The Microsoft Stock Is Expected To React

Microsoft would ship 2.5-3.0 million Surface for Windows RTs and 750,000 to 1 million Surface for Windows 8 Pros in CY12, analysts expect. Given these expectations and a range of product prices, Microsoft could generate total Surface revenue of between $1.8 billion and $2.7 billion in CY12. The company is expected to generate total Surface revenues of $540 million for first-quarter FY13 and $1.5 billion for second-quarter FY13.

In the short-term the stock is not expected to do much. But I believe, given Microsoft's proven track record in OS, the stock should slowly move higher when the street will be convinced about the company's strategy. The company is looking beyond today's tablet culture and taking a giant step towards integrating the whole computing world in a new way. The stock, currently trading around $28, is expected to outperform the market with a potential upside of nearly 30% in the medium-term.

Disclosure: I am long MSFT, AAPL. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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