MSFT: For Now, Microsoft Stock Lives or Dies With Windows 10


Microsoft (MSFT) fiscal fourth-quarter earnings weren’t all that bad, but the market’s reaction to the numbers Wednesday makes it hard to like Microsoft stock at current levels.

msftAfter all, MSFT beat Wall Street estimates by a wide margin, and yet Microsoft stock gapped down 4% at the open.

It looks like the market was disappointed by the current-quarter revenue forecast and some “just OK” results.

As an aside, the massive charge stemming from MSFT’s boneheaded Nokia (NOK) devices and services acquisition probably wasn’t much of a factor in the selloff. A charge was widely expected for fiscal Q4, and was excluded from Street estimates.

But a weak revenue forecast for the current quarter is indeed disconcerting. MSFT will launch its newest operating system in a matter of weeks, and it’s going to be a key test of a critical strategy.

MSFT’s lifeblood has long been software licenses, but the Windows and Office businesses are weak — and have been for some time — because global sales of PCs are a slowly melting iceberg.

And so, like much of the rest of the industry, Microsoft is counting on subscriptions to cloud-based services to make up the difference.

To that end, for the first time, MSFT will launch a new operating system as a free upgrade for most existing users. The idea is that Windows 10 will prompt consumers to pay for add-on services and will require a subscription to Office 365.

Windows 10 Is a Big “If” for Microsoft Stock

Make no mistake: there’s a lot is riding on this launch. Just look at FBR Capital Markets’ note to clients:

“While we characterize the June performance as ‘good enough’ in the face of a challenging PC environment, ultimately all investor eyes will be on the July 29 launch of Windows 10 as (CEO) Nadella & Co. look to make the transformational cloud transition with Windows in the hopes of reinvigorating growth in the core business and achieving similar success to the Office franchise transition.”

And yet here we are, a week away from launch, and Microsoft is already giving the market reason to worry with a current-quarter revenue forecast that was significantly below the Street’s average estimate.

On a conference call following the earnings release, MSFT forecast Q3 revenue at $20.7 billion to $21.3 billion. Analysts, however, were looking for revenue of $22.58 billion.

Windows 10 might not be at fault, but tripping on the way to the dais still makes Microsoft look like a klutz.

Worse, the market never likes it when a company cuts any part of its outlook, as analysts then have to review their own estimates. Even FBR, which rates MSFT as “outperform” (“buy,” essentially), took down its Q1 and full-year earnings and revenue forecasts.

If the early reviews of Windows 10 are favorable, Microsoft stock will probably get some kind of second-half boost. But that’s a big “if.” From Vista to Windows 8, it’s been a while since Microsoft stock enjoyed a tailwind from positive headlines.

Microsoft stock has been trading sideways for a year (something it’s been known to do for most of the last 15 years) and will need to pull off a hit to break that trend.

Unfortunately, hits are not what Microsoft is known for.

As of this writing, Dan Burrows did not hold a position in any of the aforementioned securities.

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