Microsoft (NASDAQ:MSFT) recently announced its quarterly results in which it mentioned that PC market growth is mainly driving its Windows 7 sales. Last quarter, the PC market grew by 25% year over year, while Windows 7 license sales saw 30% growth year over year. In addition to Microsoft, the stocks of PC vendors like HP (NYSE:HP), Dell (NASDAQ:DELL) and Apple (NASDAQ:AAPL) also stand to gain from faster PC market growth.
Windows 7 Key to Microsoft’s Success
The Windows Operating System division constitutes around 32% of the $32 Trefis price estimate for Microsoft’s stock, making it the most significant business for Microsoft. In another article, we discussed how Windows 7 could help Windows share in the PC market, and could be a key to Microsoft’s success. Windows 7 was made available to the wider public in October of 2009 and, according to Microsoft, Windows 7 is already installed on over 10% of all PCs worldwide.
There could be an upside of 5% to the $32 Trefis price estimate for Microsoft’s stock if the growth of the PC market (including notebooks, netbooks and desktops) exceeds our forecast and drives up sales of Microsoft Windows 7.
Below we highlight the factors that could cause the PC market to grow faster than we forecast.
Notebooks and Netbooks Seeing Widespread Adoption from Consumers
Last quarter, consumer PC sales grew at a rate of 30% year over year. We believe notebook and netbook sales are the driving factor behind this growth. Netbooks showed a tremendous growth of over 800% in 2009, growing to 3.6 million units. According to Microsoft, netbooks represented approximately 10% of the total PC market during the last quarter.
Although some netbook sales could be cannibalized by Apple’s iPad in the future (as iPad prices come down), we still expect netbook sales to outpace the overall PC market growth.
Corporate Sector Also Contributing to PC Market Growth
Last quarter, Microsoft also benefited from the return in demand of PCs from corporates. Business PC sales grew by 14% year over year, indicating the start of PC refresh cycle. This growth is also due to the increased IT spending by corporates, which has started benefiting a few software companies like Oracle (NASDAQ:ORCL), SAP (NYSE:SAP) and Adobe (NASDAQ:ADBE) as well.
5% Upside to Microsoft’s Stock if PC Market Grows Faster
Although we forecast that PC sales will be around 290 million units for 2010 (157 million for notebooks and 133 million for desktops), there could be an upside of $1.75 (>5%) to the $32 Trefis price estimate for Microsoft’s stock if it were to grow at 25% to reach around 360 million units in 2010 (210 million notebooks and 150 million desktops).
You can modify our forecast for notebook and desktop units sales above to see how Microsoft’s stock could be impacted if PC unit sales it were to increase at a faster rate that what we forecast.
For additional analysis and forecasts, here is our complete model for Microsoft’s stock.
