During the past two years, software developers in Redmond,Wash
., have been fine-tuning the millions of lines of code that
comprise Windows 8, the latest version of
ubiquitous software operating system. It's been an ambitious task,
as Microsoft has developed various flavors optimized for the
proliferating number of computing devices. There's even a version
for smartphones and tablet computers.
Judging from surveys in the tech community, the major software
push has been a success. The various flavors of Windows 8 have been
quite stable, when compared to previous versions, andoffer an
impressive array of features.
Trouble is, Windows isn't being judged against preceding
iterations. It's being judged against very impressive software
platforms being offered by
and others. As a result, the bean counters at Microsoft can no
longer simply sit back and count the cash coming in from the
regular Windows upgrade cycle it once enjoyed during the 1990s. In
fact, there may not be much of an upgrade cycle at all -- at least
according to short sellers.
Since early November, concerns have been growing that lofty
expectations for Windows 8 won't be met. Short sellers have taken
note: The short interest rose 11% to 110 millionshares in just the
two weeks ended Nov. 15 (data were released Nov. 27). It's worth
noting that on Nov. 13, two days before the data were compiled,
Steven Sinofsky, president of the Windows division, was let go.
It's unusual to see such a high level departure just weeks into a
major new product launch.
It's pretty hard to overstate the importance of the Windows
franchise to Microsoft. Apple and Google have copied the
company'sbusiness model by developing an operating platform that
can host a wide range of ancillary services. If Windows losesmarket
share -- and mind share -- then that bodes ill for the company's
Looking for clues
In coming weeks, investorswill be seeking any data points to help
clarify how the new Windows launch is proceeding. The company has
been touting the fact that roughly 40 million copies of Windows 8
are now in circulation, though it appears that a large number of
those are simply pre-loaded by PC makers that have yet to actually
sell the computers to end-users.
In a troubling sign, research firm NPD Group notes that
Microsoft-based PC sales fell roughly 20% in the past four weeks,
compared with a year earlier. Though some of those PCs were
pre-loaded with Windows 7, demand for Windows 8 computers was
likely equally lackluster. This may underscore the short sellers
view that tablet computers will continue to take market share away
from PCs. Can Microsoft take meaningful market share in tablet
computers from Apple and Google? It's simply too soon to know, but
such gains are essential if Microsoft is able to offset the
persistent weakness in PC sales.
Microsoft operates on afiscal year that ends in June, so results
for the current quarter will appear fairly early inearnings season
. At that time, the company will likely discuss an enthusiastic
response from consumers, yet it's the numbers -- not the hyped
story -- that you'll want to track. Analysts had been anticipating
roughly $22.5 billion in sales andearnings of about 90 cents
per share for the current quarter, though those figures have been
slowly trending lower as the quarter has progressed.
Yet short sellers aren't necessarily focusing in the immediate
uptake by consumers. Instead, they are focused on the much more
important corporatemarket the Microsoft ecosystem still
predominates. And in that sphere, there is cause for concern.
Coming out of the GreatRecession of 2008, companies upgraded to
Windows 7, and are generally pleased with the functionality and
stability of that iteration of Windows, according to Gartner Group.
The tech research firm predicts only 20% of enterprises currently
using Windows 7 will have migrated to Windows 8 by 2015, which
would mark the slowest upgrade cycle in Microsoft's history. The
company has typically seen at least a 50% upgrade rate, three years
after a new version of Windows has launched.
Analysts at Citigroup don't agree that a slow uptake is the
result of a disappointing product. Instead, Microsoft is simply
falling victim to a seismic change underway in computing. "Our view
remains that initial lackluster demand for Windows 8 PC is a sign
of a transition underway towards touch-enabled hardware that will
take some time." Of course, theinvestment community is known for
patience when it comes to stock-picking.
Risks to Consider:
As an upside risk, the total embrace of the tablet computing
opportunity could again make Microsoft relevant to the consumers
who have more recently embraced Apple and Google.
Action to Take -->
Did Microsoft make a leadership change in its Windows division
because the early uptake for Windows 8 was weaker than expected?
That's likely what short sellers anticipate, but it is still too
early to draw such a conclusion. We'll get a better read on the
Windows 8 launch when quarterly results are released in January.
And we'll also soon hear about 2013 budget priorities from major
information technology departments. If Gartner is correct, then
Windows 8 will not be a major priority for many companies, which
could spell trouble for the stock.
If you own shares of Microsoft, then you need to take note of
the fast-rising short position. Track the ongoing progress for
Windows 8, and if it appears that demand is lackluster, then it may
be wise to exit the stock before short sellers reallyprofit .
-- David Sterman
David Sterman does not personally hold positions in any
securities mentioned in this article. StreetAuthority LLC does not
hold positions in any securities mentioned in this article.
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