Microsoft ( MSFT ) recently announced its fiscal Q2 2011 earnings, in which the company commented that its Windows 7 operating system continues to gain adoption amongst businesses. Roughly 90% of enterprise companies worldwide have begun their OS migration to Windows 7. Microsoft is the dominant player in the PC operating system market, competing primarily with Apple's ( AAPL ) Mac OS as well as open source software companies like Red Hat ( RHT ) and Novell ( NOVL ).
Microsoft management also noted that its smartphone OS Windows Phone 7 is off to a great start as handset makers purchased over 2 million licenses in the quarter. Microsoft competes with Google's ( GOOG ) Android OS, Apple's iPhone OS, Research in Motion's (RIMM) BlackBerry OS and Nokia's (NOK) Symbian OS in the smartphone OS market. The success of Windows Phone 7 is important for Microsoft given that its previous versions struggled to gain traction over the past year.
By our estimates, Microsoft OS for PCs accounts for around 40% of the company's stock value, which we pin at $31.66 . Our price estimate is notably about 20% above market price.
Windows 7, the Fastest Selling OS in History
According to Microsoft management, the company has managed to sell 300 million Windows 7 licenses to date since its release last year, making it the fastest selling OS in history. We estimate that Windows 7 has helped Microsoft increase its market share in the PC OS market from 73% in 2008 to 75% in 2010.
Windows Phone 7 Success is Also Encouraging
Microsoft had previously been unable to generate the type of success in the smartphone OS market that it did in the PC OS market. However, according to management, Windows Phone 7 is off to a promising start and is now present on 9 devices with 60 operators in 30 markets. It also scored high on measures of customer satisfaction, with 93% of customers worldwide reportedly satisfied with the product.
Smartphone OS success not only enables higher licensing revenues for Microsoft, but also helps the company capture greater market share in the search advertising market, since Bing is the default search engine on Windows Phone 7 smartphones.
Although Microsoft lags far behind Google in the search advertising market, both companies have recognized the potential of the mobile search market and have begun to place more emphasis on this space (see Nokia-Microsoft's OS Impact on Android Limited for Now ).
The enormous potential of the mobile search market is evident from the fact that smartphones recently surpassed PCs in global quarterly shipments. According to IDC data, worldwide PC shipments were around 92 million in Q4 2010, while global smartphone shipment crossed 100 million during the same period. The rapid pace of smartphone adoption will continue to add to the value of this search market segment.
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