What Would Windows 8 Failure Mean For Microsoft’s Stock?

by Trefis Team
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With the Windows 8 operating system being central to Microsoft’s (NASDAQ:MSFT) strategy over the coming years, we think it is worth examining the impact that a potential failure of the product could have on Microsoft’s value. This is especially relevant since Windows 8 has been getting mixed reviews from critics overall.

What may come as a surprise to many, our analysis shows that even if there is a drastic decrease in Windows-based revenue due to the failure of  Windows 8, the resulting price estimate for Microsoft would still be around 25% above the current market price of $29. In our analysis, we took into account the impact of (1) a decrease in Windows market share, (2) a decline in Windows pricing, and (3) a decrease in Microsoft Office market share.

See our complete analysis of Microsoft here

(1) Windows Market Share Falls to 60% by 2019 – 5%

According to our estimates, the Windows Operating division currently makes up approximately 24% of the company’s value. In our model, we currently forecast that Windows market share among PCs will stay relatively flat around 70% until the end of our forecast period.

If Windows 8 is not a success among customers, we think the increasing popularity of platforms such as Apple’s (NASDAQ:AAPL) Mac OSX and free open-source operating systems such as Linux could cause its market share to decline rapidly. In this scenario, if Windows market share falls to around 60% by 2019, our price estimate would decrease by 5%.

(2) Windows Pricing for PC Makers falls to $30 Per License – 5%

Due to the intense competition in the PC OS industry and the advent of tablets which will likely decrease PC prices, our base case forecast estimates the price that a PC maker pays for the Windows license will decline from $55 in 2012 to around $48 by 2019. However, if Windows 8 OS fails to gain the same traction that previous versions of Windows have had, we could see the pricing for PC makers fall to around $30 per license by 2019. If this happens, our price estimate would fall another 5%.

(3) Microsoft Office Market Share falls to 75% – 5%

Our base case model assumes that the Microsoft Office productivity suite is the biggest contributor to the firm’s value at approximately 35%. Since the use of Microsoft Office is correlated with the OS installed on personal computers, we will see a decline in Microsoft’s market share if the use of Windows declines. In the scenario that Windows loses market share and Microsoft Office’s market share falls to around 75%, our price estimate for the company would fall another 5% to around $36.

Conclusion

While there are product lines we haven’t considered, such as the Windows Phone and the Surface tablet, which would also suffer due to the failure of Windows 8, our analysis shows that Microsoft would still remain undervalued in terms of estimates. Even if Windows and Office lose market share, the company can mitigate the impact due to its relatively diversified revenue streams; the Server division makes up 20% of the company’s value at present.

We believe Microsoft has the experience of handling a failed OS launch, which was demonstrated by its transition from Vista. If Windows 8 goes down the same road, we think the company will be able to weather the storm and minimize any impacts to its stock’s value.

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  • commented 2 years ago
  • tags: MSFT GOOG AAPL NOK
  • The product (to me) will short term sell extremely well, but I think that once consumers get into heavy use of the operating system, they will start having many issues. Windows 8 looks extremly cool. Sadly, once I started to get into video editing and professional gaming, Windows 8 could not hold up to its hype of the commercials and billboards. The operating is fast, quic when loading web pages and strangely plays games fast when downloading them from the Windows Store only (I tried playing GTA and it was SLOW). The OS also does not pack a punch when updating content. I had to update 7 applications and they go on and off with downloading or need to be clicked multiple times to continue progress. Windows 8 start menu is unnecessary (my opinion), Microsoft never threw int he idea to diable it and yes they are software that can be implimented in to Os to get classic start back...but why must we even have to tweak it in the first place? Microsoft put a lot of stress into Windows 8 and I can't see everyone using it. People say they love it...but is that because there computers are pre-loaded with Windows 8 or is it just a hype around there fan hive(like the person commenting bellow).
    This is why I choose Windows 7.....for "Ease of Access".
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  • commented 2 years ago
  • tags: MSFT GOOG AAPL NOK
  • WHY TAKE ABOUT A PRODUCT FAILING WHEN IT JUST CAME OUT IT JUST SEEMS YOU WANT IT TO FAIL