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Will Windows 7 be another Vista for investors?

|Includes: Microsoft Corporation (MSFT)


On the day of Microsoft’s (MSFT - $29.67) earnings, we would like to think outside the shrink-wrapped box. After initial favorable reviews, we believe issues are mounting with respect to the stability of the Win7 platform. A cursory review of user forums overflows with comments of lockups, crashes and freezes. Some snippets are attached and we encourage readers to search on their own; a Google search with these keywords will return millions of hits. We have also attached a screenshot of a user’s experience from the event log.

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Despite the beta testing and the widespread use of the release candidate, the stability problems cannot be pinpointed. More than just "software blaming hardware" (and vice-versa), the glitches are usually blamed on device drivers, power schemes, memory voltage, or BIOS adjustments. Both 64-bit and 32-bit versions appear to have similar complaints; as do laptops versus desktops configurations. The common error message points to a critical power-kernel event, which only communicates a general system crash where Windows was not shut down properly. The frustrating part for consumers and IT managers is the inability to replicate the sequence and identify the culprit(s).

In actual use, there is no blue screen of death, but rather a static frozen desktop (sometimes black), from which there is no escape aside from the power button. The attendant loss of data (and possible frozen stock trading!!) creates a meaningful deterrent to mission critical projects.

We also have accumulated anecdotal evidence that the OEM buyers of Win7 (the box guys) are concerned about their end customer’s level of satisfaction with machines they are shipping with Win7 pre-installed. There are very limited downgrade paths remaining given MSFT’s decision to stop XP support.

In our view, it is only a matter of time until these issues hit the mainstream press. At that point, investor uncertainty over the corporate migration to Win7 will surface, in our opinion. We just don’t see any Street research that even addresses that a problem may exist. As a "public domain" stock, most analysts rely on company IR and some macro models of PC units, then try to finesse the consensus numbers with estimates of buybacks, Bing, etc.

But IF Win7 rollout assumptions are scaled back because of stability or compatibility problems, this issue will become the real game changer for the stock.

Disclosure: short calls and long puts in MSFT