Can Mobile Offerings Move Microsoft Stock in 2011?

January 26th, 2011 by Trefis Team
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Microsoft (NASDAQ:MSFT) has long ruled the world of PCs but now is trying to make a push into mobile devices as well given that growth in mobile devices such as smartphone and tablets are growing rapidly. This will pit Microsoft against other tech bellwethers like Google (NASDAQ:GOOG), Research in Motion (NASDAQ:RIMM) and Apple (NASDAQ:AAPL) that are making smartphones and tablets as well as corresponding operating systems for mobile phone and tablet devices.

Our price estimate for Microsoft’s stock stands at $31.56 which is about 13% above current market price.

Microsoft has been less successful than its competitors in the mobile market and has so far been unable to demonstrate that it can be a leading player in this space. For example, its Windows mobile operating system for smartphones has been losing market share. According to Gartner, Windows mobile operating system accounted for only 5% of worldwide smartphone sales in Q2 2010 and this figure was further reduced to 2.8% in Q3 2010. [1] [2] To make up for this, Microsoft will need to improve its offerings for both smartphones and tablets. Its upcoming Windows version which will be compatible with ARM-based devices should help. 

Around 10% upside if Windows can grab 20% of mobile market share

Microsoft is working on a version of Windows that will work with tablets. While this move is significant given the amount of traction that tablets are getting, we doubt Microsoft’s ability to grab market share here in the near term due to the popularity of Google’s (NASDAQ:GOOG) Android and Apple’s (NASDAQ:AAPL) iOS. Nevertheless if we assume that Microsoft can grab 20% of mobile operating system market share, it could potentially double its “PC Games, Windows Mobile, CE and Other revenues” by end of our forecast period.

This is influenced by the fact that the pricing for mobile operating system is likely to be low. Microsoft charges only about $15 per license for Windows Mobile and given the fact that mobile phones are likely to drive most of the mobile market, we have assumed average pricing of $20 taking into account higher priced versions for tablets as well. [3]

The impact of increased revenue is itself small due to low operating margins of this segment. However, the above scenario could lead to much higher margins than we forecast. Overall, the upside to our price estimate could be of the order of 10%. Below you can see how improved operating margins for this segment can help Microsoft.
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Notes:
  1. Gartner Says Worldwide Mobile Phone Sales Grew 35 Percent in Third Quarter 2010, Smartphone Sales Increased 96 Percent, Gartner Press Release, Nov 10 2010 [↩]
  2. Gartner Says Worldwide Mobile Device Sales Grew 13.8 Percent in Second Quarter of 2010, But Competition Drove Prices Down, Gartner Press Release, Aug 12 2010 [↩]
  3. Hey, Android People, Is It True That The All-In Cost Of Android Is Much Higher Than $15 Per Unit?, Business Insider, Aug 30 2010 [↩]