Microsoft will offer guidance for the current quarter and that will shape up against estimates of $0.60 EPS and $17.38 billion. Thomson Reuters has its consensus estimates at $2.56 EPS and $69.65 billion in revenues for the Fiscal-2011. Everyone will want to draw inference here on Apple Inc. (NASDAQ: AAPL), but Apple has stalled as far as a stock. Due to Apple’s growth of the last year and due to the perpetual dead-money stance of Microsoft as a stock, Apple still has nearly $100 billion more in market capitalization per our own Real-Time 500 monitoring of the 500 largest companies by market cap.
Perhaps the biggest issue of all is Intel Corporation (NASDAQ: INTC). Intel managed to beat earnings and maintain above-consensus guidance in a manner that stunned everyone. The belief on Wall Street and Main Street was that Intel would warn ahead. This supports the notion that WinTel alliance could be a dup win. Another issue is Google Inc. (NASDAQ: GOOG), where Microsoft is actually winning back some search share with Bing. Its partnership with Yahoo! Inc. (NASDAQ: YHOO) ran into some technical difficulties in the first quarter, but this is supposed to be part of what is helping Microsoft.
We would always worry that perhaps Japan will be an issue for Microsoft. So far, the damage to business there has not seemed to be as deep as the fears were initially. The company is a quarter past the Kinect hype, but we have to wonder about all these reports on slowing PC sales due to smartphones and tablets taking all of the steam. Neither Intel nor Microsoft have been big beneficiaries of this tablet-PC and smartphone growth. Still, the same logic was being used by many for Intel and they managed to say that those figures might not be as grim as the headlines may have suggested.
The consensus analyst price target remains elusive… That is still up closer to $33.50 per share. Most analysts are lukewarm on the fundamentals but warm on value. It is hard to think of Microsoft as a value stock considering that it had been the greatest growth story of all-time before Apple came along. Some even argue that Microsoft is a value trap. We do consider it a value stock rather than a value trap. Our only issue is that with a market capitalization of more than $200 billion we don’t know how much money value investors are willing to keep throwing that way when there are many mid-cap value stocks that could be private equity or peer merger target companies down the road.
We opined back in the first days of 2009 that Microsoft and many other key technology companies are no longer growth companies. They are utilities, and we have not changed that opinion in the slightest. We don’t want to get too far off the edge and say they are toasters, but let’s say that they are close. If we use the Thomson Reuters estimates of $2.56 EPS for 2011 (JUne) and $2.76 for 2012, it gets hard to argue over whether or not Microsoft is cheap. It trades at just over 10-times this year’s earnings and about 9.6-times forward earnings. So, it is value… But Microsoft also trades almost like a traditional utility company. Microsoft even comes with a 2.4% dividend yield.
We still use the monthly options rather than the weekly for interpreting expected price moves. That is arguable in theory now the weekly expiration contracts are active, but that’s how we still see moves for pricing. The May-2011 options expiration has expectations for anything up to a $1.00 move in either direction. Remember, today that translates into an expected market cap change of $8.4 billion in either direction.
Here is the good news about Microsoft now. It is effectively a unique situation. Its Windows smartphone is a distant competitor of Apple, Google, and R-I-M platforms. Its video game system may have some pick-up in perception after the woes of Sony Corporation (NYSE: SNE) from its hack attack. Windows 7 has sold very well, but it has not impressed investors.
When it comes to this sector, most investors and analysts continue to see more enthusiasm in Apple. We would like to point out this comparison though of real upside versus perceived upside: the current analyst expected upside in Microsoft is over 26%, and the implied upside in Apple (at close to a $447 consensus target) generates almost 29% expected upside from the $347 share price today. Our theory is that the market capitalization rates may have gotten in the way of both stocks. Maybe you can even blame the love of gold and silver as taking away from Apple and Microsoft…
Microsoft shares are up about 0.5% at $26.50 ahead of earnings and its 52-week trading range is $22.73 to $31.43. As a reminder, Microsoft has a weighting of 15.22% in the Software HOLDRS (NYSE: SWH) ETF, a weighting of 7.58% in the iShares S&P North America Tech-Software (NYSE: IGV) ETF. Stay tuned.
JON C. OGG
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