Barclays Ups Estimates; Sees Margin Strength on New Products

Holt, who has an Overweight rating on Microsoft shares and a $37 price target, argues that consensus estimates on the Street don’t but reflect “the potential of Win 8 or Office 15 in CY13 numbers,” referring to the at once versions of its Windows operating system and its productivity suite.

Further, the company can look forward to favorable pricing to help move units of tablets running Windows, and he thinks versions of Windows 8 running on processors based on designs of Intel competitor ARM Holdings may cut down on instances of Windows piracy around the world.

Significant price increase with its SQL 2012 release

MSFT had a significant price increase with its SQL 2012 release, with blended pricing increasing upwards of 15-20% partly [...] During we do not expect Windows Server 8 to see a price increase of the same magnitude of SQL, we do expect to see more modest increases. Additionally, meaningful improvements in System Center will help total ASPs, during substantial upgrades of the Hyper V capabilities should drive the premium Windows Server mix above the 25-30% levels seen today. Behind the traditional product portfolio, we sense the momentum around Azure [Microsoft's "cloud computing" service] has accelerated with MSFT now seeing more demand for both its Platform as a service offering as then as finished applications like Dynamics, Exchange Online and Office 365. As these products scale and sustain then above double digit growth, they should ultimately have a positive impact on the multiple.

Lest you doubt the lift for the stock, Holt points out some of the precedents for share appreciation around major product introductions in past: Microsoft stock has tended to rise 13% from the introduction of a beta release of Windows through the consumer roll-out of the product.

Holt as a matter of fact cut his fiscal Q4 estimate for Windows revenue to $4.2 billion from $4.7 billion to reflect a coupon Microsoft is giving to PC buyers. Nevertheless for then year, he raised his Windows revenue estimate to $21.2 billion, during maintaining his estimate for the “Busines Division” revenue at $26.1 billion. He sees operating profit margin of 38.8%, up from a prior 38.5%, to arrive at $3.16 per share in profit, up from $3.11.

Lastly, his argument for the stock has a lot to do with cash generation: “Cheap is not an investment thesis in tech, however with a 15% free cashflow yield, MSFT is dirt cheap and is entering a period of both accelerating revenue and EPS growth as then as likely positive revisions.”

Update: FBR Capital’s David Hilal issued a somewhat more mixed report today. On the one hand, Windows 8 is “generating a lot of interest. And Microsoft’s disclosure of the terms for the upgrade — $14.99 for each copy — was “then timed,” he thinks, “as it will help mitigate a stalling of PC purchases and promote customer satisfaction while the back-toschool season.”

Blog on research investing written

Tech Trader Daily is a blog on research investing written by Barron's veteran Tiernan Ray. The blog provides news, analysis and original reporting on events important to investors in software, hardware, the Internet, telecommunications and related fields. Comments and tips can be sent to: techtraderdaily@barrons.com.