) is expected to announce its fiscal year Q3 earnings on April
28th. The key factors to watch for in the release are the
performance of Windows operating system (OS) for PCs and
smartphones, and the operating margins of the company. Windows OS
accounts for roughly 40% of the stock value by our estimates.
Microsoft competes primarily with Apple's (
) Mac OS as well as open source software companies like Red
) and Novell (
) in the OS market which it dominates with around 76% market share
according to our estimates.
We currently maintain
$31.64 price estimate for Microsoft stock
, which is about 25% above market price.
Windows OS Continues to Do Well
Last quarter, the company announced that it has managed to sell
300 million Windows 7 licenses since its release last year, making
it the fastest selling OS in history. We believe that Windows 7 was
primarily responsible for the market share gain for Microsoft last
Windows Phone 7, an OS for smartphones, has not gained much
traction yet, with Google (
) Android, Apple (
) and Research in Motion (RIMM) gaining market share at
its expense. To put the numbers in perspective, Windows Phone 7
subscriber market share actually declined from 9% in November 2010
to 7.7% in February 2011, according to Comscore. This data looks at
smartphones sold in the U.S. However, the company mentioned that
93% of the customers worldwide are reportedly satisfied with the
product, which augurs well for the OS from the long-term point of
Operating Margins a Concern
We estimate that the company's operating margins declined from
around 40% in 2009 to 36% in 2010 primarily due to pricing declines
for its OS licenses as it continues its expansion into emerging
markets. Microsoft's Office operating margins have declined from
around 65% in 2009 to 61% in 2010, and we believe this could
continue as it introduces more cloud-based products that will lead
to a lower margin product mix.
These could be a worrying sign for Microsoft as it brings out
cheaper cloud-based products in order to compete effectively with
Google Apps. We discussed this concern in detail in our earlier
2 Microsoft Concerns That Could Deflate Our
See our full analysis for Microsoft.