For all the power of the Microsoft franchise, there has been little doubt that the company has been struggling during the past several years as is well reflected in its modest MGI-X scores. Still, we have seen a sea change in Microsoft starting with the June 2009 quarter which translated into improved MGI scores in the Sep 2009 quarter. We believe that the period of low operating efficiency for Microsoft has now passed and that is at least partly reflected in improved MSFT share performance over the last 4-6 months.
The rollout of Windows 7 to date has been extremely successful and any launch issues so far appear to be minor when contrasted with the problems that have surrounded Vista from the very launch till now. Perhaps Microsoft as a company has finally understood that users today do not want significantly extended desktop functionality but rather dramatically increased stability in what they already have. The users want to be able to control their desktop TCO and reduce support costs rather than obtain more functionality that is rarely used.
Notably, Apple has recently taken the same tack with its release of Snow Leopard OS. This is also timely given the dramatic rise of smart phones, net books and tablets as the new platforms of choice. In addition, we believe that there will be a healthy refresh cycle in PCs during 2010 benefiting Microsoft but perhaps at a slower upgrade pace than is currently priced-in by investors.
We expect improving results in the MSFT interactive entertainment segment led by Xbox. On the valuation basis amongst its peer group of large cap tech names, MSFT is priced at levels below its peer group averages while its Gross Margins are second only to Oracle. Although the shares have broken out above the $28-$29 price range we discussed in our note of September 17th, we continue to view the shares as attractive. MSFT is announcing Dec 2009 earnings on Jan 28th 2010.