Ballmer's boys are back
Microsoft recently announced earnings and confirmed that the PC refresh cycle is well underway as evidenced by corporate PC sales growth of around 16% and single digit consumer PC sales growth in the latest quarter versus the same period a year ago. []
Due to IT budget cuts and uncertainty regarding the economic recovery, many companies and consumers held back on spending in 2008 and 2009 leaving technology bellwethers like Microsoft, Oracle, SAP and Adobe worrying about when this spending would return.
We expect Microsoft to benefit broadly, but see two drivers in particular that will lift its share price: 1) higher netbooks and notebook sales, and 2) software licensing for companies, also known as productivity software.
Combined, we could see these segments add 12% to our current $30.67 Trefis price estimate, which is about 13% higher than current its current market price.
Growth in Notebooks and Netbooks
The overall PC industry, including desktops, notebooks and netbooks, grew 10% overall last quarter versus the same period a year ago. Given pent up demand, Microsoft management expects sales growth to remain brisk until at least mid-2011. []
We currently expect the number of notebooks and netbooks unit sales to grow from 176 million in 2009 to 328 million by the end of Trefis forecast period, at an average annual growth of around 8%. However, if notebook and netbooks sales show an average annual growth of 12%, we forecast an additional upside of around 5% to the $30.67 Trefis price estimate for Microsoft?s stock. See our chart below.
Given the trend for lower priced mobile computers and emerging market growth that tripled developed market growth, we feel that a 12% growth assumption for the netbooks and notebooks segment is reasonable.
Software Licensing a Profit Engine
Microsoft dominates the productivity software market which is focused on the corporate market and had around 95% market share in 2009. This segment showed double digit growth and includes Microsoft Office, SharePoint and Exchange [].
We currently expect productivity software sales to increase from around 305 million in 2010 to 415 million licenses by the end of Trefis forecast period at an average annual growth rate of 5%.
However, if this growth rate parallels PC sales growth of 10% since 1) users with newly purchased PCs will likely install Windows 7 – the latest version of the Windows OS, and 2) more users adopting Windows 7 will lead others to upgrade their systems, then new licenses could reach 600 million by the end of Trefis forecast period adding 7% to the Trefis share price estimate.
You can see the complete $30.67 Trefis Price estimate for Microsoft stock here.
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