SAN FRANCISCO (AP) -- A Morgan Stanley analyst says he believes Microsoft's prospects are a lot brighter than the software maker's stock price implies as investors fret about a deepening downturn in personal computer sales.
In a Tuesday research note, Keith Weiss of Morgan Stanley asserted that the worries about the PC slump and criticism about Microsoft's radical makeover of its Windows operating system have hammered the company's stock down to levels that should attract bargain hunters.
Weiss says he thinks most investors have overlooked the value of Microsoft divisions outside the PC industry and are also discounting the possibility that PC sales could improve during the second half of this year as more touch-control devices are released to take full advantage of Windows 8, the revamped operating system currently being panned by most analysts.
If his thesis pans out, Weiss expects Wall Street's negative sentiments about Microsoft to ease and propel the company's stock toward Morgan Stanley's rice target of $36. That's a price that Microsoft's stock hasn't touched since 2007. Other price targets among analysts polled by FactSet range from $27 to $38.
Weiss put an "overweight" rating on Microsoft's stock.
Microsoft shares gained 18 cents to $28.86 in Tuesday's late afternoon trading. The stock has lost 7 percent in the past year.
Many investors have been shunning Microsoft because of fears that the software maker's clout is waning as more technology shifts away from desktop and laptop machines to smartphones and tablet computers.
That trend doesn't bode well for Microsoft Corp., whose Windows system and other software products have dominated the PC industry for decades. Most mobile devices rely on software made by Apple Inc. and Google Inc. By Morgan Stanley's estimate, PCs accounted for 30 percent of device sales last year, down from 67 percent in 2008 — the year after Apple's iPhone came out.
Windows 8 represented Microsoft's attempt to adapt to the mobile shift. The redesigned operating system displays applications in a mosaic of interactive tiles and can respond to touch commands, as well as the use of a keyboard and computer mouse.
Although Microsoft insists it's pleased with the early response to Windows 8 since its release nearly six months ago, other evidence paints a gloomier picture. The most distressing development came last week when International Data Corp. released a report estimating that worldwide PC shipments during the first three months of the year had plunged 14 percent, the steepest quarterly decline since the research firm began tracking the market in 1994. What's more, IDC blamed Windows 8 for driving away prospective PC buyers confused by the new design.
Weiss contends PC sales will rebound as more touch-control devices running on Windows 8 come out. He also expects Microsoft to make tweaks to Windows 8 — a project known within the industry as "Windows Blue" — later this year to broaden the operating system's appeal.
Even if PC sales decline by 10 percent from Microsoft's fiscal year ending in June 2014 through the fiscal year ending in June 2017, the company should still be able to boost its earnings slightly as it makes money outside the PC business. He estimates Microsoft divisions that don't depend on Windows are worth more than $27 per share by themselves.
The value of some of those non-Windows divisions are likely to draw more attention later this year, Weiss said, when Microsoft releases a new model of its Xbox 360 video game console. Weiss says he believes the new Xbox could be unveiled as early as this summer.