MSFT: 10 x 10 + 7 = Buy?

When Microsoft releases a new OS, typically it is a good time to buy the stock (MSFT) 6 months before launch. With Windows 7 getting good reviews and launching later this year/early next year now would look to be a good time to buy. Add to this the fact that Microsoft stock has been flat for over 10 years and now has a P/E just over 10 and Microsoft look like a strong buy. But, I am skeptical for 3 reasons.

First, netbooks are exploding in sales, and this isn't good for Windows revenues. In the good old days, a PC ran about $2000 and Windows was $100 of that or 5%. Now, netbooks sell for under $400, with one currently selling for $268, and are on the way to $200. While Windows 7 runs well on them (although the interface many not be suited for a 8-10" screen), there is no way Microsoft will be able to charge anywhere near $100 for the OS on a device that sells for under $350. They will be lucky to get $50 for it and more likely something in the $25 range (they are only getting $15 for XP). As consumers shift to netbooks Windows revenues will go down.

Second, Microsoft's other cash cow is Office and it is not clear how long they will continue to be able to charge $300+ per seat to corporations for this. Google is coming at them with Google Apps that runs over the internet and is free with ads or $50/seat/year without them. Google says more than 1 million businesses and 10 million users are currently using it. With no new must have features in Office for 10 years, the need to upgrade isn't strong and free alternatives and online competitors are getting close in terms of quality and features.

Third, technology is moving in the direction of mobile phones and cloud computing. While Ray Ozzie is pushing Microsoft in the right direction with regards to cloud computing, (Windows Live Mesh won the Crunchy for best Technology Innovation) this market is likely to be competitive with Google, Amazon and others and monopolistic profits non-existent. With regards to smart phones, the Windows Mobile platform competes just adequately with other solutions from Apple, Palm, Google, RIM and Nokia. There will be no monopoly in this market either. While Microsoft may successfully compete in these new markets, it is unlikely there will be new large profits from them.

I think it is still a good time to buy MSFT and ride the wave of Windows 7, but with Windows and Office revenues likely on the way down and no new large profitable markets to replace them, it will be time to exit again in a year.