The Exchange

Microsoft: Has the Downward Spiral Begun?

The Exchange

Software giant Microsoft (MSFT) took some lumps on Friday, when NPD Group reported that sales of its new Windows 8 tablets were "almost nonexistent" and that early November sales of Windows PCs in general fell a whopping 21% in the last year. The news came after it was reported on Thursday that Microsoft had cut supply orders for its new Surface tablet in half, presumably due to less-than-impressive early sales results.

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What's more, the launch of Windows 8, the company's latest update to its industry-leading operating system, on October 22, clearly did not provide that boost that Microsoft and its investors had hoped for. "It hasn't made the market any worse, but it hasn't stimulated things either," NPD analyst Stephen Baker told The New York Times.

Microsoft's stock price fell by as much as 1.5% in intraday trading Friday, ending down 1.2% at $26.61. Is the House That Gates Built finally in real trouble? Here's what the analysts are saying.

Brian White, Topeka Capital Markets: "The macro [economic] weakness is weighing in on PC demand and the plethora of new tablets is driving more conservatism on the part of the PC makers. The Windows 8 ramp is much lower than expected a few months ago, partly related to these issues and others."

Mark Moerdler, Bernstein Research: "Windows 8 tablet unit sales have been less than 1 percent of all Windows 8 device sales and ~6% of Windows 8 notebook sales were touchscreen devices. Given the nature of Windows 8 and the premium commanded by touchscreen devices, we believe more touchscreen notebooks entering the market (particularly at lower price points) should be a catalyst for Windows 8 going forward. We expect more touchscreen devices to enter the market over the next weeks and months."

Chris Whitmore, Deutsche Bank: "As in past cycles we expect the introduction of a new Microsoft OS to spur an increase in PC demand. However...we believe Win8 will have a more muted impact than prior cycles for several reasons. 1) Win8 reviews are mixed due to a confusing UI; 2) there is a lack of Enterprise interest in Windows 8; 3) tablet form factor complicates positions (Win8 vs. Windows RT); 4) continued substitution of PCs by iPads/tablets."

Zack's Equity Research: "While the Surface tablet from Microsoft Corporation was expected to emerge as a third option [to the Apple iPad and Amazon Kindle], it has done poorly until now. This may partly have to do with a $500 price tag which is warding off potential customers. Customers seemed to be waiting for Microsoft to release Surface tablets running the Windows OS on Intel Corporation's processors. The Surface models in stores now use Windows RT running on low powered ARM processors. Meanwhile, the iPad continued to dominate sales for now, with the iPad Mini being sold out at several stores."

On the bright side, however, Microsoft is still worth roughly $223B, making it the third-largest tech company in the world behind Apple (AAPL) ($550B) and Google (GOOG) ($229B). IBM (IBM), its closest competitor in the tech race, has a market cap of $216B, while "upstarts" like Amazon (AMZN) and Facebook (FB) trail at $114B and $60B, respectively.

What do you think? Are Microsoft's recent Windows 8 difficulties a sign of more trouble to come or just the temporary speed bumps that come with any new product?

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