Microsoft’s Server and Xbox Sales Offset Slowing Windows, $32 Fair Value Unchanged

Microsoft (NASDAQ:MSFT) has announced its earnings for Q2 FY12. ^[1] It reported its best quarter yet, with quarterly revenue of $20.89 billion, growing around 5% year-over-year. Though revenue from the Windows division has declined almost 6%, the 11% growth in revenue from the Server and Tools business and 15% growth in revenue from the Entertainment and Services division more than compensated for slowing Windows sales. 2012 is going to be a major year for Microsoft as it launches Windows 8 and a series of other new products. We expect Windows sales to show a significant jump following the launch of Windows 8 in mid-2012.

We have a Trefis price estimate of nearly $32 for Microsoft, which stands around 10% above its current market price. Here are the most important drivers which should have the most impact of Microsoft’s stock price going forward.

Check out our complete analysis of Microsoft

Office

Office is the most valuable business of Microsoft, and accounts for more than 30% of its value. Revenue from Office and other business offerings like Lync, Exchange, Dynamics and Sharepoint grew nearly 3% year-over-year this quarter, with Dynamics and Lync showing the most growth. Microsoft has sold more than 200 million licenses of the Office 2010 suite since launch. It currently has around 95% market share in productivity software. Though the market share is expected to decline marginally due to increasing competition, we expect a steady increase in the revenue from that division.

Windows

Windows is the second most valuable division of Microsoft, account for nearly 25% of its value. There was a 6% decline in revenue from Windows this quarter, as sales of Windows have slowed down. We expect sales to get a significant boost once Microsoft launches Windows 8 around mid-2012. Windows 8 will target the desktop, notebook and tablet market, and is expected to sell more licenses than Windows 7, which has sold close to 525 million licenses to date. The launch of new slim, ultraportable notebooks called ultrabooks should also help Windows 8 sales.

Xbox and Windows Phone

We expect the Entertainment and Devices division, which is comprised primarily of the Xbox, Kinect and Windows Phone to show the most growth in percentage terms in the coming years. Revenues from this division grew 15% this quarter, and are expected to grow even faster in 2012 as Windows Phone gains traction in the smartphone market.

Microsoft has sold more than 66 million Xbox consoles and 18 million Kinect sensors since launch. The launch of Kinect for Windows should drive further revenue growth in the next quarter. Xbox currently has around 20% market share in gaming consoles. We expect it to increase throughout the forecast period.

Understand How a Company’s Products Impact its Stock Price at Trefis

1. Microsoft Reports Record Revenue of $20.9 Billion in Second Quarter, Microsoft [↩]