I am the proud owner of 25 shares of Microsoft Corporation stock (MSFT: Google Finance, Yahoo! Finance). These shares were purchased on 3/23/2006 at a price of $27 per share.

After selling my SIRI stock last week, I was itching for somewhere to put that money. MSFT had been on my radar for a while and was an obvious target for me. It seems I wasn’t the only one considering investing in MSFT though, because the stock had a rally from the low $27s last Monday to just over $28 this Tuesday.

While I was pondering, a few things happened:

  1. Microsoft revealed their Origami handheld device.1
  2. Sony announced a delay in the release of their Play Station 3 gaming console.2
  3. Jim Cramer talked up the stock on his radio show… twice.

I thought I had missed the boat. But then this Tuesday Microsoft announced a delay of their own3. The consumer version of Windows Vista, the next installment in the Windows Operating System, will be released in January 2007 rather than the previously-planned “second half of 2006”. The “corporate version” is still planned to be released this November though.

News of the delayed release erased the previous week’s rally, taking the stock back down to the low $27s Wednesday. Is this my second chance to jump aboard the MSFT train? Is this a buying opportunity for MSFT?

Reasons I am Investing in Microsoft Today:

  • The delay of the PS3 and the fact that analysts predict Sony’s gaming console could retail for as much as $500-$900 (well above the $300-$400 price point for the Xbox 360) means that more people will buy the Xbox 360 now. Gamers who were waiting for Sony’s console may give in and buy a 360 now. In addition, Microsoft will have more time to release titles and an opportunity to drop the price of the 360 before Sony comes to market with the PS3.
  • When Vista is released, everyone will be forced to upgrade over the next two years. Any new computer sold after the Vista release will include the new OS. Microsoft will make a ton of money selling this product.
  • A new version of Microsoft Office (Microsoft’s other cash cow) will be released later this year.
  • New versions of Microsoft’s server and development tools are also in the works.
  • Money is Moving to “Safe” Stocks: There has been a bit of speculation lately that institutional money will be moving into safer stocks in anticipation of a bear market. Despite numerous warning signs, our market doesn’t seem to be slowing down one bit. If true though, I can’t think of a stock with a safer reputation than Microsoft.
  • Online Services Competition: Microsoft’s online services like Live are going to gain a tremendous amount of market share when Vista makes its way onto people’s computers. These services are going to be featured in or possibly integrated into the OS. Users new to online bookmarking, image searching, map search, etc. will use the Microsoft versions since the icon is right there on their desktop. Also, many experienced users will switch to Microsoft services because of the easy OS interoperability.
  • OS Competition: There are rumors that Apple may build their windows manager and applications to run on top of Windows and leave the OS game altogether!4 Add to this the fact that Linux penetration on the desktop is not moving as fast as some predicted.

Risks to This Investment:

  • Further product delays: this isn’t the first time Vista has been delayed (remember Longhorn?).
  • Everyone is talking Xbox and PS3, but there is another player in the console business: Nintendo. And Nintendo is a BIG player. I’m much more excited about the Nintendo Revolution, which I feel has more potential than the Xbox 360 and PS3 combined.
  • Office Share: Many schools are at least considering moving away from MS Office to open source alternatives. In addition, the $100 laptop (which brought me to purchase some AMD shares a while ago) has the potential to break the cycle of life that has sustained Office for so long: kids learn Office in school and then demand Office at work.

References
[1] Microsoft’s Plans For Handheld Game Player And “iPod Killer” by Dean Takahashi.
[2] Playstation 3 Release Delayed by May Wong.
[3] Vista Delay Good for Pundits by Marc Perton @ engadget.
[4] Will Apple Adopt Windows by John C. Dvorak.

“When Vista is released, everyone will be forced to upgrade over the next two years. Any new computer sold after the Vista release will include the new OS. Microsoft will make a ton of money selling this product.”

Everyone will not be forced to upgrade after 2 years. Product support for XP will last a lot longer than that. Many businesses are still on Windows 2000. I know of a very large financial institution that still is, and I doubt Vista is even on their radar.

The reaction from the vast majority of consumers is “who cares?”. There will that small segment that will stand in line to buy it at 12:00 AM, but it won’t be the vast majority.

Many businesses and most people will receive Vista when they decide to buy a new computer. But they won’t be buying a new computer because of Vista.

While that is true, and I even work with systems still running NT 4. It’s not the best situation. In fact, those currently running 2000, and there are alot are the most likely to upgrade to Vista, most likely in conjunction with a hardware upgrade, entirely skipping XP.

You’re also right in saying that people won’t be standing in line at 12:00am to buy the newest OS. There are however many businesses, and consumers who are on the verge of upgrading, many of whom will put off the upgrades until Vista is released.

Vista is the first major upgrade since XP which was released in 2001, and represents as great a change in the underlying architecture, if not greater, than was presented by Windows 2000.
While Vista won’t be the sole driver of new hardware sales, or vice-versa. The release of Vista combined with the upcoming change in architecture will provide a compelling reason to upgrade.

There’s no denying that not everyone will buy a new computer, just for Vista, it’s also unreasonable to expect that people who have new computer won’t upgrade to Vista. So assuming that there is no growth in hardware sold due to Vista, which I seriously doubt, there will be the added revenue of individuals and businesses who will opt to upgrade their current systems.

But even if we look at just what we’re presented with now. Microsoft is a strong company. It has a growth rate of close to 10% TTM. Is expected to grow 15% over the next year and average a growth of 15% over the next 5 years. It’s return on investment approaches 30%. As if that wasn’t enough, even today based on it’s pretty much stagnant stock price, and consisted growth of near 10% the stock is undervalued and would be more faily valued at 34-36 dollars a share, according to most analysts.

In the end I think that at $27 a share Microsoft is a steal, and I’ll be picking some up as soon as possible. Though, I’ll prolly wait a bit and see if it drops much lower, just to add some extra padding.

Jay, I think you make a good point: no one is going to force people to upgrade. However there are a lot of reasons to upgrade.

A major part of the new operating system is going to be a greatly improved security system. This alone will encourage a lot of IT and IM departments to switch to Vista. Besides that, we should expect Microsoft to begin phasing out support of Windows 2000 shortly after Vista releases… just like they did with Win95.

I agree with Frank, both in his defense of the new OS and his waiting to see if the price drops some more.

I may have been a little hasty buying at $27; there could be more downside to the Vista delay. But then that’s why I only bought 25 shares. I’m ready to buy 25 more if the price dips below $26. I believe we’d have to see some more bad news before the stock goes below $25.50 again.

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