Morgan Stanley downgrades Microsoft over Win 8, PC market concerns
- 10 January, 2013 23:20
Concerns over Windows 8 sales and over the PC market dynamics have prompted Morgan Stanley to downgrade its recommendation on Microsoft's stock.
Morgan Stanley, which previously rated the stock as Overweight, the equivalent of a "buy" recommendation, has now lowered it to Equal Weight, the equivalent of a "hold" recommendation. Microsoft declined to comment on the report.
In a research note published on Thursday, Morgan Stanley analysts wrote that they don't expect a near-term improvement in the PC market, especially because corporate sales will weaken as businesses' upgrade cycle to Windows 7 gets closer to completion.
This weak PC market will not only hurt Windows 8 sales, they wrote, but also the new version of the Office suite -- Office 2013 -- which is due to ship this quarter.
In addition, the Morgan Stanley analysts have been unimpressed by the first sales wave of Windows 8, which began shipping in late October.
"PC growth saw a significant deceleration in 2Q/3Q and PC data suggests that Windows 8 has not been a significant driver of growth in the market with sluggish holiday season sales," reads the research note, authored by Adam Holt, Jennifer Swanson Lowe and Melissa Gorham.
Last week, NPD Group reported that Windows 8 "did little to boost holiday sales or improve the year-long Windows notebook sales decline" as Windows notebook holiday unit sales fell 11 percent, similar to what happened on Black Friday and in 2012 overall.
In November, NPD Group warned that the consumer Windows PC and tablet market hadn't gotten the needed boost from the Windows 8 launch.
However, this week Tami Reller, CFO and chief marketing officer of the Windows Division, said that Microsoft has sold more than 60 million Windows 8 licenses so far, "roughly" in line with Windows 7 sales at a similar release stage three years ago.
"We feel good about what we've been able to accomplish," Reller said at a presentation at the JP Morgan Tech Forum, adding that there is "so much more opportunity ahead."
There is intense attention on Windows 8 sales because the OS upgrade is one of the most important products in the company's history.
With a user interface that has been radically redesigned for touch-based devices, Windows 8 has been architected to help Microsoft improve its small market share in the red-hot tablet market dominated by Apple's iPad and by Android devices.
Despite Reller's positive spin on Windows 8 sales, some industry analysts remain skeptical about the new OS's performance in the market.
"I'd caution you to recognize that 'licenses sold' and 'licenses deployed' are not the same thing. Licenses are sold with new PCs, but many customers downgrade back to an older operating system aboard professional grade products," IDC analyst Al Gillen said via email.
Gartner analyst Michael Silver said that it's not clear what's the story behind the numbers Reller provided.
"They don't seem to be overly high or overly low that would indicate huge success or huge failure -- and even Vista sold millions of copies," he said via email.
Silver also indicated that "lots of issues" negatively impacted Windows 8's launch, including the delay of many new computers.
"It seemed to be anticlimactic, and there was lots of hardware that could have made it more exciting that was delayed. You get the feeling Windows is treading water until the ecosystem -- and maybe even the next release -- come together," Silver said.
Reller acknowledged in her presentation that the initial supply of Windows 8 touch-based devices -- like tablets, hybrid laptops and all-in-one systems -- was insufficient and that distribution was in some cases improperly allocated. Microsoft has been working on fine-tuning these issues, she said.
According to the Morgan Stanley analysts, Microsoft's business could be helped if the company decides to release an Office version for iOS devices, which could add between $1 billion and $2 billion to the annual revenue. However, Microsoft has been mum on this point, and its reluctance so far to offer Office for iPads and iPhones is seen as a competitive move to help sales of tablets running Windows 8 and Windows RT, the Windows 8 version for devices based on ARM chips.
For now, Morgan Stanley expects Windows' share of the tablet OS market to be 9 percent this year, down from its previous forecast of 14 percent. The company is also adjusting downward its revenue forecast for Windows, Office and other software products. Overall, Morgan Stanley now expects Microsoft's fiscal year revenue and profit to be $79.91 billion and $2.83 earnings per share, respectively, down from the previous forecast of $83.52 billion and $3.01 earnings per share.
Microsoft's stock closed down almost 1 percent at $26.46 on Thursday.
Juan Carlos Perez covers enterprise communication/collaboration suites, operating systems, browsers and general technology breaking news for The IDG News Service. Follow Juan on Twitter at @JuanCPerezIDG.
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