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    MSFT Surprises Wall Street

    By Stock Charts | April 29, 2007




    Microsoft (MSFT) surprised Wall Street last Thursday, reporting earnings of $4.93 billion, or .50 cents a share. Numbers for it’s new Windows Vista OS and Microsoft Office 2007 Suite were impressive as well, laying to rest concerns that Vista was having some difficulties and not measuring up to expectations. In early February, CEO Steve Ballmer suggested that some of the early sales estimates may have been “overly aggressive,” spooking many investors. On top of that, Dell began switching back to Windows XP on many new computers after consumer complaints about Vista’s complexity and compatibility.

    vista.png

    In spite of this, Microsoft reported 20 million Vista licenses sold in it’s first month, 71% of which were the higher priced “premium” version. Office 2007 sales surpassed expectations as well, beating estimates by $200 million. Vista sales should increase in the following months as more consumers upgrade their computers, software and games become optimized for Vista, and businesses start switching over after the initial kinks and bugs are ironed out.

    On the online front, things are beginning to look brighter as well. While Microsoft’s Live search has long trailed Yahoo (YHOO) and Google (GOOG), the bleeding seems to have stopped, as Microsoft’s search market share increased to 10.1% in March 2007 compared to 8.9% in January 2007. Microsoft’s Adcenter platform has also seen some improvement, showing a 23% increase in ad revenues.

    The Entertainment and Devices division seems to be the only weakness, with revenues decreasing from $1.18 billion down to 929 million. 500,000 Xbox units were sold this quarter, but the Zune music player is having a rough time competing with the big boy on the block, the ever ubiquitous iPod. While Microsoft loses money for each Xbox sold, the increased consumer base should ultimately allow for more games sold and increased revenues further down the line. CFO Liddell “reiterated the expectation that the Entertainment and Devices unit, which also includes the Zune portable media player, will become profitable in fiscal 2008.”

    Microsoft Chart

    In short, Microsoft’s future looks bright. The company has repurchased $6.7 billion in stock and continues to pay out dividends to shareholders. Guidance for 2008 is solid, with an expected 11% revenue growth or a $5.0 billion revenue increase. Following Thursday’s report, shares increased 3.51% to close at 30.12. David Hilal, an analyst at Friedman Billings Ramsey & Co. Hilal, who has an Outperform rating on Microsoft’s stock, raised his price target on the shares to $38 from $35. Citigroup’s Thill boosted his rating on Microsoft’s stock to Buy and raised his price target to $36. Despite last week’s gap up, I believe there is still room for upside, especially in the mid to long term.

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