Microsoft Corp. has been on a tear recently, raising the obvious question about whether the upcoming release of its Windows 8 operating system has already been built in to the share price. The answer: Maybe not.
The shares rose 26 per cent from the start of the year to their high in mid-March. They’ve since settled back a little but remain 18.3 per cent higher in 2012 – or more than double the gain of the benchmark S&P 500.
The reason seems largely related to upbeat expectations for its new operating system, an ambitious upgrade that caters to touch-screen tablets and the more traditional mouse-and-desktop operations.
The system is expected to be launched in early June, and some of the early write-ups have been positive. According to a review in PC Mag, “Windows 8 is evidence that the old tech company is quite capable of bold moves and impressive innovation.”
Of course, even without good reviews, Microsoft tends to benefit from periodic upgrade cycles, when consumers and businesses that use PCs habitually migrate to the latest version of Windows. But if Windows 8 is a hit – and the stock market seems to think that it will be – then this upgrade cycle could be particularly strong.
According to Adam Holt, an analyst at Morgan Stanley, the gains in the share price this year do not fully reflect this view. “It’s widely known that MSFT outperforms into a Windows release, but less well known is that over 70 per cent of the absolute performance generally happens after the RC [release candidate, or an early release of the software that might not be quite bug-free yet]– and this should be helped by improving PCs,” he said in a note (via Tech Trader Daily).
It will be interesting to see if genuine enthusiasm for a Microsoft product can at last help the stock break free of its doldrums. Over the past decade, the share price has for the most part been stuck in a narrow trading range between $25 and $30, even as earnings have grown. The shares now trade at just 11-times earnings, about half the average price-to-earnings ratio between 2002 and 2009.