4% Upside to Microsoft from Slower Windows Margin Decline
Microsoft’s (NASDAQ:MSFT) operating margins for the Windows operating system (OS) business have declined from an estimated 77% in 2006 to around 68% in 2009. We expect this margin decline to continue over our forecast period as netbooks and Windows sales in emerging markets account for a bigger share of Microsoft’s sales mix.
Microsoft competes with Google (NASDAQ:GOOG) and Apple (NASDAQ:AAPL) in the operating system market. Since Windows accounts for 40% of Microsoft, the stock is significantly impacted by Windows OS Operating Margin. We currently have a Trefis price estimate of $28 for Microsoft’s stock, about 16% above the current market price of $24.
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Since the average selling price (ASP) of Windows for netbooks is significantly lower than the average overall ASP (~$30 vs ~$70), the margins on netbook-related sales are likely to be significantly lower than average. We expect the ASP differential to continue even with newer versions of Windows. A higher mix of Windows sales attributable to netbooks will negatively impact margins in the future.
In addition, the selling prices for the Windows OS in emerging market tend to be lower than prices in developed markets. We expect emerging markets to account for an increasing part of overall PC units over the forecast period meaning that a lower average selling price across geographies may have a negative impact on Microsoft’s margins.
The average of Trefis member forecasts for Windows OS Operating Margin indicate a decrease from around 70% in 2010 to 66% by 2016, compared to the baseline Trefis estimate of a decrease from around 64% in 2010 to 61% by the end of the Trefis forecast period. The member estimates imply an upside of 4% to the Trefis price estimate for Microsoft’s stock.
You can drag the forecast trend-line above to express your own view, and see the sensitivity of Microsoft’s stock to Windows OS Operating Margin.
Our complete analysis for Microsoft’s stock is here.
Note:
1. Microsoft reports Windows OS operating margin in its SEC filings.