Windows Phone 7 with Steve BallmerWhen Goldman Sachs (GS) delivered its one-two punch to Microsoft (MSFT) on Oct. 3, downgrading its recommendation to neutral from buy and lowering its earnings estimates by 3% to 4% over the next three years, Microsoft's stock quickly felt the pain. The shares fell on Oct. 4 by 47 cents, or nearly 2%, closing at $23.91. Why the change of heart from Goldman -- and what can Microsoft do to get the influential firm -- and investors -- to reconsider?

Microsoft's tablet cupboard is bare, and Corporate America is taking its sweet time in upgrading its Windows-based computers. Those are the two near-term factors that prompted Goldman Sachs analyst Sarah Friar to drop her enthusiasm for the stock.

As she pointed out in her research note: "We believe the intrinsic value of shares cannot be unlocked if the status quo remains, and we have increased caution near term on a more elongated PC refresh cycle, combined with the newer threat of notebook cannibalization from tablets, where Windows does not yet have a presence." She further noted: "Concerns over the longer-term sustainability of the Windows/Office franchise have clearly weighed on the stock."

Greater Focus Needed

Regarding a remedy for what ails Microsoft, Friar has her own three-point plan. It includes jacking up the dividend to shareholders beyond the recent 23% increase, designing a coherent consumer strategy and exhibiting leadership when it comes to cloud computing.

If Microsoft is able to come through on these three points, Friar says she'd consider reversing her 12-month stock price target, which she lowered to $28 a share from $32, as part of her revised outlook.

According to Friar's research note, Microsoft's consumer strategy suffers from the proverbial shotgun approach and instead needs greater focus. Particularly, Friar is hoping the software giant will devise a "credible" response to the threat from tablet computers and smartphones that threaten to erode its prized and profitable Windows business.

Microsoft will have a chance to show if it can respond to that threat next week during its launch of Windows Phone 7, which it designed to do battle with Apple's (AAPL) iOS 4 and Google's (GOOG) rapidly advancing Android mobile operating systems. But getting the mobile market on its side won't be easy, considering Microsoft's troubled track record in delivering user-friendly and endearing mobile operating systems.

Several Signs to Watch


In addressing the Oct. 11 Windows Phone 7 launch, Friar said: "The initial release of the [Windows Phone 7] phone will be through AT&T in the U.S., iPhone's exclusive carrier, making the launch more difficult out the gate. The Windows Phone 7 Series does mark a departure from Microsoft's mobile OS predecessors, but for Microsoft to gain credibility in mobile, we believe the company will need to see immediate success."

Investors can gauge Microsoft's results by watching several signs: mobile traffic data, developers clamoring to develop third-party applications for Windows Phone 7 and holiday sales of mobile handsets loaded with Windows Phone 7.

On the tablet computer front, Microsoft CEO Steve Ballmer said over the summer that Windows 7 tablets are on the way, and plenty of them should be showing up before year-end. To date, however, not one manufacturer has released a tablet computer running Windows.

With the critical holiday season fast approaching, Microsoft can bet investors are keeping a close eye on the calendar. Oct. 11 will provide the first glimpse of how those holiday sales might turn out.

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erteterttrrt

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October 06 2010 at 5:12 AM Report abuse +1 rate up rate down Reply
Fred

Yeah it's in their DNA. The company, (i.e. Gates) strong-armed its way into dominance as the "Al Capone" of the computer world. The courts eventually recgonized that. MS has never created ANYTHING original, not even the OS. Gates bought the original dos from a poor guy in NM for $50,000 and, all but blackmailed and bullied companies to use it. Who made the first data base programs, word processing, spread sheets, broswers, search engines, media players, ISPs, and on and on? Not MS, but MS either took them over or strong-armed them out of competition by bundling the MS versions with windows until it was forced to stop doing that. Now Gates, a near-crook in my opionion, tries to pawn himnself off as a philanthopist and world benfactor.

October 05 2010 at 11:54 PM Report abuse +1 rate up rate down Reply
Happy Face

It's time for Microsoft to fix that buggy Internet Explorer. (Not Responding.) Windows 7 has been out for many months now. Just when are they going to fix this? I wish I had Windows XP again. It was more dependable. Maybe we should switch to Apple? It should be like drugs from the drug companies. It isn't released untill it's proven itself.

October 05 2010 at 11:09 PM Report abuse +2 rate up rate down Reply
dgs755

Nosamall , they most likely shorted the stock before offering their unwelcome comments. Goldman Crooks

October 05 2010 at 10:36 PM Report abuse rate up rate down Reply
Nosamall

It would seem after Goldman Sachs took taxpayer money in order to keep from going out of business. The analyst may have been a little hard on Microsoft stock. Making money is the name of the game, but any more there better be not too greed by any party!

October 05 2010 at 10:31 PM Report abuse +1 rate up rate down Reply
mallycj

I have a three point plan for sara friar. 1. shut up about things you have never done. 2. get away from the government subsidized wall street gang. That is worse than welfare 3. go to work for a living doing something useful and productive. As evil as Bill Gates may be, he has done more of value than the entire rotten gang at the vampire squid goldmann sachs and the rest of the wall street scam artistes and parasites put together. They do nothing but drag the country down.

October 05 2010 at 9:37 PM Report abuse +2 rate up rate down Reply
robertkrosky

iS THIS WHAT MAKES THE WORLD GO AROUND?

October 05 2010 at 8:15 PM Report abuse rate up rate down Reply
k4jlp

Joe Lizak You are 100% correct Goldman Sachs push paper and total BS They make nothing for America only it's elite... Energy futures contracts are jacking the price of commodities draining every last drop of wealth from our people.

October 05 2010 at 7:46 PM Report abuse +7 rate up rate down Reply
soalmorgan

And just how does this affect the price of peas in Peoria? Us poor working stiffs are still getting reamed by both these companies. Adjusted for inflation weges have fallen by about a third in the last thirty years while the rich keep getting richer. In another ten or twenty years working people won't be able to afford computers or IRAs, we'll be lucky to afford food and shelter. I'm not talking about semi-literates with no job skills, they will be the first to starve, I'm talking about welders, machinists , nurses, teachers, plumbers, carpenters etc... People that build the things that make the nation run won't be able to afford the "middle class" life they are accustomed to. That IS when the revolution starts. Best the Uber-Rich get their greed under control now before the process reaches a point of no return.

October 05 2010 at 7:14 PM Report abuse +6 rate up rate down Reply
sitemfg

Bill Gates is an evil ego. Watch out for him and his empire...

October 05 2010 at 5:46 PM Report abuse -1 rate up rate down Reply