Through TheFly's Eyes: Microsoft Corporation
from Theflyonthewall.com





Last night Microsoft (MSFT) announced a delay in the release of their next-generation Windows Vista operating system. The company said they are on-track to complete the product this year, with business availability in November 2006 and broad consumer availability in January 2007. Consumer availability was previously expected to come this year.

Brokerage firms see considerable market impact coming from this announcement, and not only for Microsoft. Merrill Lynch, which rates Microsoft a Buy, believes the delay of the operating system creates near-term uncertainty and overhang, but expects the company’s revenues to rebound in the third quarter of 2007. Lehman Brothers and J.P. Morgan Chase both feel the delay is not a large risk and both continue to rate Microsoft an Overweight. UBS Warburg and Deutsche Bank both believe the Vista delay is a positive for Apple Computer (AAPL), which will launch the next version of its operating system, "Leopard," as soon as November, and a negative for Dell Computer (DELL) and Hewlett Packard (HPQ). Soleil Securities also feels this announcement is a negative for Gateway (GTW).

Although one would think the news that Microsoft would delay the introduction of the next version of its operating software, Vista, would spark a substantial sell-off in the computer and related sectors, it was not the case in mid-day trading Wednesday. True, Microsoft was down 77c to $26.98, but the computer sector was only mildly lower: Hewlett-Packard was down 50c to $33.55, but Dell was down only 25 cents to $29.97, while Apple, expected to benefit slightly from Microsoft’s delay, was up 50c to $62.30. Meanwhile, the broader tech and semiconductor sectors were mixed –a mild response, many analysts argued, given Microsoft’s role in operating systems and modern business information processes. What caused the initial, muted response? As is so often the case on Wall Street, traders and institutions appear to have discounted the Vista delay weeks before the announcement – i.e. already priced-in the expected sub-par news. Further, several sector watchers did not characterize the delay as a big negative for Microsoft and the sectors it influences: one analyst said Microsoft’s delay represents a postponement - not a loss of sales – essentially shifting sales to the subsequent quarters, with no reduction in the company’s 2006 earnings. Further, while some see mild gains for Apple-based systems, to-date no Wall Street professional sees a major market share loss for Microsoft: the delay represents a setback, not a catastrophe. And provided Microsoft can make good on its revised Vista release of November 2006 for businesses, January 2007 for consumers, Wall Street apparently is willing to give Microsoft a “pass” regarding this bit of sub-par news.

Our Options analyst notes that Microsoft’s option implied volatility of 18 is near its 26-week average, implying non-directional price fluctuations. Hewlett Packard’s option implied volatility also implies non-directional price fluctuations, but Dell Computer’s implied volatility of 19, at the low end of its 52-week range, implies decreasing price risks for April.

Our Technical analyst notes the news of the delay has caused the stock to trade down mid-day to $26.98 on heavy volume. On a technical basis this puts the stock under the midpoint of the narrow neutral/bullish price channel it has traded within over the last five months (the bottom of this channel is at $26.01, its midpoint is at $27.12, and the top is at $28.24). The $27 area is one that has been an important inflection point over the prior two years. Dips below it have been sold down to around the $24 area, crosses above $27 have been bought up to the $29 area. There is likely to be something of a battle at this level. Many value investors use $27 as an entry point and may come out to "defend" the stock at that level. The action may resemble a tug of war on either side of $27 until there is a "break" (clear resolution of the direction price is going to go in which would mean a strong move up or down). Support is currently at $27.04, $26.63, $26.22, $26.01 (the lower level of the channel, very bearish if broken). Resistance is currently at $27.13, $27.59, $28.24 (the top of the channel, very bullish if there is a "breakout" above that price).