Microsoft tumbles, but setback seen as temporary
The delay in Vista is actually a bigger problem for PC makers and retailers than for the software company, analysts say.
ByAmanda Cantrell, CNNMoney.com staff writer

NEW YORK (CNNMoney.com) - Microsoft stock sank Wednesday, a day after the company delayed the launch of its new operating system, but the biggest hit from the delay will be taken by companies other than Microsoft itself, industry analysts said.

Microsoft (down $0.72 to $27.02, Research) shares sank nearly 3 percent in early trading on Nasdaq after it said Tuesday that it will push back the consumer launch of its Windows Vista operating system, the first major update of Windows since 2001, to January 2007. Vista for business customers will still be available in November 2006.

Analysts who track the stock say that the news is bad for PC makers, retailers and chip makers, who had hoped computers with Vista would be a big-ticket item for the holiday season, but that it wasn't that big a deal for Microsoft.

That's because the No. 1 software maker will probably recoup whatever revenue it loses in the last quarter of this year when Vista launches next year, the analysts said.

"The financial and fundamental impact is not as severe as some might fear," said Christopher Hickey, an analyst with London-based research firm Atlantic Equities, who has a neutral rating on the stock.

"We expect impact on revenue will only be about 1 percent, and most of that will be recouped in the March quarter. Investors take a longer-term view of Microsoft. The short-term timing of Vista is less of a concern," he said.

Tuesday's announcement was the latest in a string of delays for Vista, and will impact customers who were hoping to buy PCs with Vista pre-loaded for the holiday season.

David Hilal, an analyst with Friedman, Billings, Ramsey & Co., called the delay "almost par for the course" for Microsoft.

He thinks it will not have a significant impact on Microsoft's December quarter and has lowered his revenue forecast for the quarter by 2 percent. He also shaved 2 cents off his earnings estimate for the December quarter but raised expectations for the March and June quarters.

"I'd remind investors that when Microsoft gets products to market late, they don't lose market share," said Hilal. "Other companies will race products to market before they should because they are fearful of losing market share. With Microsoft, they're not going to lose market share, so they have a little bit more flexibility to delay product releases."

Analysts from Forrester Research called the delay "intelligent but embarrassing" in a note to clients. "Better to delay the release than ship a flawed product," the analysts wrote.

Sunil Reddy, a portfolio manager for Fifth Third Asset Management whose firm owns shares of Microsoft in its Large-Cap Growth fund, said that as an investor, he'd rather see Microsoft delay the launch than have to spend the money fixing problems on a premature launch. Reddy said as a long-term investor, he is not concerned about the near-term impact of the announcement, but he added that more cyclical investors will likely have a different reaction.

PC makers impacted slightly

Not every analyst is shrugging off the news, however.

The blow to PC makers and retailers means Microsoft may have to subsidize some free upgrades, according to Samir Bhavnani, principal analyst in the mobile electronics and computing group at industry research firm Current Analysis.

"This delay causes them to miss the biggest consumer buying season of the year," he said. "If you are HP or Dell or Circuit City, you were banking on people buying PCs with Vista."

Shares of HP (Research) are down about 1.6 percent in today's trading, while shares of Dell (down $0.15 to $30.12, Research) and of retailer Circuit City are both down about one percent.

Reddy of Fifth Third added that the "food chain effect" of Microsoft's delay will also impact PC and component makers who are exposed to the consumer segment. The news has hit those companies harder, because they derive a greater portion of their sales from the consumer market than do companies like Dell and HP, who sell most of their PCs to corporate customers.

PC maker Gateway (Research) fell nearly three percent. Chip maker Nvidia (Research), which makes graphics chips for PCs, fell 4.3 percent on the news. By comparison, Intel (Research) fell about 1 percent, while shares of its rival AMD (Research) declined about 1.7 percent.

"The Vista delay is going to impact consumer sales in retail," said Bhavnani. "That is Gateway's bread and butter."

Management changes = Further delays?

Peter Misek, senior technology analyst with Canaccord Capital, a Toronto-based brokerage and investment firm, said he believes the company could announce even further delays, in part because of a reported management shakeup in the company's Windows division.

Microsoft is expected to name Steve Sinofsky, a senior vice president in Microsoft's Office group, to head up the group that oversees Windows, according to the Wall Street Journal. He would replace James Allchin, co-president of Microsoft's platforms and services division, who was expected to retire following the launch of Vista, according to the report.

"If they are going to change senior management, that could have an impact" on the launch of Vista, Misek said. "I'm surprised that some people are washing their hands and saying this is not a big deal."

Misek added that the news will likely upset Microsoft's biggest partners, including PC makers Dell and Hewlett-Packard, who had been hoping to sell Vista-ready PCs for the holiday season -- which, along with the back-to-school season, is one of the two biggest sales seasons of the year for PCs.

"I expect some of their partners are going to want blood," he said.

-------------------------

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Canaccord's Misek does not own shares of Microsoft, but his firm does banking business with the company. Top of page

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Most stock quote data provided by BATS. Market indices are shown in real time, except for the DJIA, which is delayed by two minutes. All times are ET. Disclaimer.

Morningstar: © 2014 Morningstar, Inc. All Rights Reserved.

Factset: FactSet Research Systems Inc. 2014. All rights reserved.

Chicago Mercantile Association: Certain market data is the property of Chicago Mercantile Exchange Inc. and its licensors. All rights reserved.

Dow Jones: The Dow Jones branded indices are proprietary to and are calculated, distributed and marketed by DJI Opco, a subsidiary of S&P Dow Jones Indices LLC and have been licensed for use to S&P Opco, LLC and CNN. Standard & Poor's and S&P are registered trademarks of Standard & Poor’s Financial Services LLC and Dow Jones is a registered trademark of Dow Jones Trademark Holdings LLC. All content of the Dow Jones branded indices © S&P Dow Jones Indices LLC 2014 and/or its affiliates.