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Windows 8 a waiting game for Microsoft investors


Microsoft CEO Steve Ballmer speaks at a press conference Thursday in New York announcing the retail launch of Windows 8.

With the wait for Windows 8 over, the next question facing Microsoft Corp.’s investors is likely to be: Where is the payoff?

That question could be taken many ways. For Microsoft (MSFT), it will likely center around how soon it sees widespread adoption coming from what is arguably the most important upgrade to Windows since the company used the Rolling Stones song “Start Me Up” to promote Windows 95 nearly two decades ago.

For consumers, it will be answered by whether they feel the need to not just upgrade to the new operating system but also to purchase new, touch-enabled devices, such as Microsoft’s own Surface tablet, as well as other PCs that are optimized for the touch-screen features of Windows 8.

And for investors, it will come down to whether there is enough confidence in what Microsoft is doing to support a stock that has performed better in 2012 than in recent years, but which is also viewed with a fair amount of trepidation by the market.

“Historically, Microsoft underperforms following Windows launches, but, historically, that has followed a period of significant outperformance running up to the launch,” said Atlantic Equities analyst Chris Hickey. “This time around, the stock has underperformed running into the launch, which suggests investor expectations are very low.”

‘Historically, Microsoft underperforms following Windows launches, but, historically, that has followed a period of significant outperformance running up to the launch.’

Chris Hickey, Atlantic Equities

Hickey has an overweight, or buy, rating on Microsoft’s stock, and a $39 target price on the company’s shares. On Thursday, Microsoft’s stock was trading at around $28 a share, and it is up 8% this year, making it look like a gem after giving up 7% in 2011 and 8% in 2010.

But Microsoft’s shares have underperformed both the Nasdaq and S&P 500 in that same time. And its stock price is also down 5% since the company’s first-quarter earnings report on Oct. 18, in part over concerns about whether Windows 8 has the goods to spur the company’s endeavors in business areas in which the likes of Apple Inc. (AAPL), Amazon.com Inc. (AMZN), Samsung and Google Inc. (GOOG) have multiyear head starts. Read: Microsoft’s benefit of the doubt is done.

“There is no expectation of an immediate catalyst [from Windows 8],” said Ross MacMillan, an analyst with Jefferies & Co. “The stock’s performance indicates that.” MacMillan has a hold, or neutral, rating and $34-a-share price target on Microsoft’s stock.

MacMillian said that the release of Windows 8 is different from past operating-system upgrades in one major respect: This time around, the OS is central to an entirely new form factor in PCs, and while Windows 8 can run on many current PC models, it has been specifically designed to work best with tablets and PCs with built-in touch-screen technology.

“[Windows 8] is about ultrabook hybrids, convertibles and tablets,” MacMillan said. “Manufacturers have been reluctant to build much inventory of new products as they are concerned about adoption and what form factors will prove popular.”

MacMillan added that as far as any big lift from businesses adopting Windows 8 on a large scale, “business adoption takes longer than consumer adoption.” MacMillan estimates that businesses are a little more than halfway through upgrading to Windows 7, he said.

“We would not expect to see Windows 8 embraced by the majority of companies until 2014, or later,” MacMillan said.

“There’s just not the same level of pent-up demand,” said analyst Brad Reback of Stifel Nicolaus. “Every other Windows release was not hardware-dependent like this one.”

Reback, who has a buy rating and $36-a-share price target on Microsoft, said that, for anyone looking for a payoff from Windows 8, patience will be more necessary than at any other time in Microsoft’s recent history.

“Any time there’s a meaningful technology change, people get uncomfortable,” Reback said. “And there’s probably not going to be a big bang in the first quarter or two out of the gate.”