Thursday, June 21, 2012

MSFT: Street Enthused over ‘Surface,’ Though Confusion Possible

Shares of Microsoft (MSFT) are up $1.14, or almost 4%, at $30.98 as the Street mulls the multitude of issues and prospects raised by the company’s introduction yesterday afternoon of the “Microsoft Surface” tablet computer, a 10.6-inch slate branded by Microsoft, destined to run the company’s Windows 8 operating system, distinguished by a detachable cover with a touch-sensitive keyboard.

The first impressions appear to be quite favorable. Engadget’s Dana Wollman was on hand yesterday afternoon and filed this review. Wollman says it was hard to get a sense of the performance of the Intel (INTC) -processor based model, as little actual demo time was allowed. The keyboard was also not able to be tested. Forbes’s Eric Savitz was on hand and has this video commentary. And Bloomberg’s Cory Johnson filed this video report describing the battle between Surface and Apple‘s (AAPL) iPad.

Today, everyone following Microsoft and everyone following Apple, and everyone following anything touched by them, is weighing in with a view on what it all means. There is substantial appreciation for what Microsoft has shown off, and also some skepticism about how Microsoft will manage competing to some degree with partners such as Hewlett-Packard (HPQ).

Even the folks at credit rating agency Fitch Ratings weighed in on the announcement. There’s no impact on Microsoft’s sterling credit rating, obviously.

But Fitch opines Microsoft won’t remain in the tablet hardware business, instead insisting that Microsoft partners will take over that responsibility:

Microsoft’s decision to offer its own hardware platform could clearly rankle its OEM partners, such as Dell and HP, but likely reflects its level of nervousness over the initial cannibalization of PC demand by uptake of the iPad and Android tablets. Microsoft’s decision to limit distribution to its own stores and some undisclosed Web sites should placate its OEM partners. Fitch does not expect Microsoft to remain on the hardware side of tablets long term, assuming the OEMs can develop a successful product. While OEMs will be unlikely to move away from Windows, at least in the near term, we believe the addition of the Surface tablet could potentially spur greater product innovation by OEMs, a core competency that has been significantly underwhelming in recent years relative to new product introductions from Apple.

Rick Sherlund, Goldman Sachs: Reiterates a Buy rating and a $37 price target on Microsoft. “The hardware appeared well engineered and elegantly designed, offering a thin, lightweight, tablet or Ultrabook-like form-factor, optimized for both content consumption and content production like the Ultrabook-touch devices we have written about over the past several quarters [...] At the event we spoke with Mr. Ballmer and Mr. Sinofsky. Microsoft will be selling its tablets initially through its own on-line and retail stores, permitting Microsoft to capture a greater portion of the retail sales price in its HW margins. Microsoft’s HW partners are no doubt unhappy about Microsoft’s entry into the Windows 8 touch HW business, as they will necessarily need to deliver competing solutions, and we think Microsoft has set a high-bar for comparisons.”

Adam Holt, Morgan Stanley: Reiterates an Overweight rating on Microsoft shares. “While the production of hardware has not always been positive for MSFT (homeruns like Kinect offset by misses like Zune) and raises questions about gross margins, the Surface looks promising at first blush and should help MSFT gain share in the tablet and hybrid market�which is all largely incremental to the numbers, and possibly the multiple. While we need more details on apps, content and some areas of performance like battery life, Surface’s innovative Touch Cover keyboard, compatibility with Office, integrated USB ports and features optimized for Skype should help MSFT differentiate.”

Raimo Lenschow, Barclays Capital: Reiterates a “Positive” rating on the shares, and a $36 price target. “Ultimately we expect the tablets to be priced to effectively compete with the iPad [�] The overall design of the Surface was compelling [�] Regardless of how the tablet performs, confusion surrounds the timing of Microsoft’s decision to get back into the hardware business in a meaningful way [�] So, the company has potentially damaged their relationships with the OEMs [�] while also creating confusion for consumers, as they are now given the choice of purchasing a tablet that is meant to harness the functionality of Windows 8 versus purchasing a traditional PC with Windows 8 that may not allow the user to realize all of the benefits of the new OS. The bottom line is that we still see a significant amount of confusion surrounding the Windows 8 release.”

Peter Misek, Jefferies & Co.: Reiterates a Buy rating on Apple stock and an $800 price target. “We do not view these devices as competitive or as a threat to the iPad. Though pricing details are unclear, we believe Microsoft will need to significantly undercut the iPad to be competitive [�] We believe the most important factor in the success of a tablet is its ecosystem. Based on our discussions with developers, we find the lack of enthusiasm concerning and believe Windows 8 tablets will struggle to compete with the iPad, and to a lesser extent Android tablets such as the Galaxy Tab/Note. Also, we believe the two versions may cause some confusion for consumers.”

Philip Winslow, Credit Suisse: Reiterates an Outperform rating and a $38 price target. “Monday’s announcement marks a major milestone for Microsoft, as the company enters the tablet market with a Microsoft-branded, vertically-integrated offering. We believe the Microsoft Surface tablets will help set the standard for Windows 8 tablets built by OEMs, which in turn could drive further adoption if the Windows 8 platform [...] We remain encouraged by the potential of upcoming product releases, particularly Windows 8. Based on a more tablet-friendly UI, improved power consumption, Instant-On, and other capabilities, we believe Windows 8 will have a more meaningful position in tablets than the market appreciates (particularly in the business user segment), which we expect to serve as a catalyst for the stock.”

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