BUY OR SELL-Microsoft profit strong, investors seek next act
* Software giant beats Street but stock falls
* Buyers say new product cycle underestimated
* Doubters see holes in mobile, online strategy
By Bill Rigby
SEATTLE, July 23 (Reuters) - Microsoft Corp (MSFT.O) sailed past Wall Street's earnings and sales estimates on Thursday, helped by the popularity of its Windows 7 system, but the software giant's stock dropped in Friday trading.
The shares are down 16 percent this year, compared to a flat Nasdaq composite index .IXIC. Apple Inc (AAPL.O), in comparison, is up 23 percent this year. The stock is trading in the same $25 range it was almost 10 years ago, after the explosion of the tech stock bubble.
Many argue that the company's growth days are behind it, yet 29 of the 38 Wall Street analysts polled by Thomson Reuters I/B/E/S recommend buying the stock, while eight say "hold" and only one rates it "underperform." What are the arguments?
"The results and guidance clearly reflect optimism on the broader IT spending environment," said Sid Parakh, analyst at McAdams Wright Ragen Inc. "With many new enterprise products on offer, Microsoft is well-positioned to capitalize."
The company's move to slightly lower its operating expense target "reemphasizes the focus on controlling spend and growing margins," said Parakh, who rates the stock a "buy" with a $38 price target.
The shares offer "incredible value," he said, in the context of recent performance and the company's near-to-mid potential.
"The Street continues to under-appreciate the product cycle Microsoft is currently going through," said Caris & Co analyst Sandeep Aggarwal. "Except for the successful launch of Windows 7, the Street has not given much credit to the launch of Server, Azure, Office 2010, SharePoint, and the upcoming launch of Kinect."
"The competitive risks from iPad/tablet and mobile are over-blown," said Aggarwal, who rates the stock a "buy," with a $35 price target. "In the coming months Microsoft will very likely emerge as a strong force in the tablets market and will be able to offset some of the cannibalization of Windows-based PCs/netbooks that is happening because of the absence of compelling tablet devices running the Windows operating system."
Despite Microsoft's strong earnings, three analysts reacted by moving their price targets for the stock down, citing investors' low valuation on Microsoft's growth prospects and macroeconomic concerns.
No analyst polled by Thomson Reuters I/B/E/S rates the stock a "sell," but some are less optimistic about growth prospects, and are worried that Microsoft is falling behind rivals in some areas.
"There's an awful lot of positives going on there, but nothing's moving the needle in terms of investors," said Colin Gillis, analyst at BGC Financial, who rates the stock a "hold" with a $29 price target. "People are still asking, 'What is going to be the next act?'"
The Windows and Office franchises will continue to produce billions of dollars in operating profits each quarter, but Microsoft is "increasingly becoming a laggard in its ability to serve the consumer market," said Gillis.
"Consumer computing is quickly shifting away from laptops/desktops, and Microsoft is poorly positioned. An effective launch of Windows Phone 7 is critical for the company."
Microsoft is also struggling to make real headway with its new search engine Bing -- which powers Yahoo Inc's (YHOO.O) searches -- and may not succeed with attempts to turn the Xbox into a profitable online social hub.
"Even with scale from powering Yahoo's search, the economic benefits to Microsoft are meager given the traffic payments. It is not clear this segment is going to be profitable," said Gillis. (Reporting by Bill Rigby; Editing by Richard Chang)