I'm skeptical that PC makers will suddenly offer Linux for the consumer PC and I'm skeptical that the consumer would accept this any time soon. With that said, how bad would it be if this DID become reality?
The consumer PC operating system is about 1/3 of MSFT's business (correct me if I'm wrong). The remaining 2/3 of their business are in areas that have competing products (ie. server market, office products, MSN, video games, development tools, Win CE, etc. etc.) MSFT is in many, many different areas and they have many different products (see the link to their product selection; about 700 different software titles). These areas aren't monopolies and if the PC OS isn't a monopoly either, the impact is simply less market share and more competition. MSFT has an excellent record of succeeding in areas they DON'T have a monopoly in, so why wouldn't this be true if the PC OS market suddenly became competitive?
And, what happens if Linux is widely offered? The PC OS products (Windows) contribute less to the bottom line at MSFT. How much less is a question that can't easily be answered. But, you can make some assumptions. Let's say that earnings from the PC OS market falls 50%. Actually, let's look at a scenario where PC OS EPS disappears completely. No more EPS from the PC OS in any form including .Net. MSFT would argue that this will NOT happen, but let's look at this possible worse case scenario.
Doesn't the current stock price (when compared to may of the companies in their sector) look as though it's fairly priced without taking the PC OS into account? An argument can be made that the EPS from all of their other products is substantial enough and growing rapidly enough to justify the current stock price all by itself. Take the EPS from PC OS out completely and aren't we left with EPS of around $1.00 per share? A PE of 57 for a software company with rapidly growing earnings doesn't seem out of the ordinary to me. Yes, they do have rapid growth in virtually every area of their business other than the PC OS. Why is a PE of 57 out of line for this type of company (look at the other software manufacturers)? And that's taking out the entire PC OS contribution to earnings, which is a very unlikely scenario.
This is off the top of my head and likely the figures are off somewhat, but it's a worthy look at this doomsday scenario that the bears are laying out before us. Is there really much downside left in MSFT, even given a massive shift in the market place that might never take place? If someone would take a shot at expanding on this thought and plugging in some more accurate numbers, I'd appreciate it.
Dave
By the way, the Nasdaq has been plummeting the last 3 days and MSFT has only fallen about $1. |
