Friday, October 28, 2005

Gone Till November: Face the Music, Softee

Investors and traders alike are still showing Gates and Co absolutely no mercy.

In a story we ran last month, we assumed that sooner or later, the Microsoft bears would be overtaken by the bulls:

Speaking of magazine covers, that's already two for Microsoft in the last month. Is Wall Street being too hard on Mr. Softee?The Street's consensus on Microsoft is quite negative, awkward with the new XBox game console due out in November. Let's not forget the rumored AOL deal and the long awaited 2006 Vista launch. 2006 may represent Microsoft's strongest growth & product cycle in years.

Clearly, our prognosis was a bit premature.

On Thursday, Microsoft (MSFT) shares slid after the Redmond giant reported a 24 percent jump in profits on robust sales of Windows.

Analysts didn't like how Mr. Softee cooled expectations of a sales spike when its Xbox 360 video game console launches in a month.

CFO Chris Liddell said that the company is aiming for more of a "gradual ramp" of Xbox sales to avoid running out of machines early after the launch.

"The analysts were expecting more of a launch spike than we were," Liddell added.

Could it be that MSFT is strategically lowering guidance so as to "surprise" the Street when the XBox numbers finally come in?

We wouldn't be surprised -- the software king is on life support as Google feeds off whatever remains of the Microsoft carcass.

But don't give up on Mr. Softee, yet.

Trading at 19 times 2006 EPS, way below the average 26 P/E of its software peers, Microsoft's a buy for those piqued by mature growth and a committment to stock repurchases.

As for us, we will not back down on Microsoft -- that means we stick to our hold rating, even as we simultaneously swing our pom-poms for team Google.

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