Buy Microsoft, short Intel or AMD

Buy Microsoft, short Intel or AMD

Duncan Stewart, Financial Post

Published: Thursday, February 08, 2007

Go long Microsoft, and short either Intel or AMD. To misquote Shakespeare, I haven't come to bury Microsoft, but I am not about to start praising it either. Interestingly, one of the reasons I am confident in this pair trade is the sheer number of very smart people who are not praising Microsoft in a fairly emphatic way.

Initial reviews of Vista, Microsoft's new operating system, were damning in their faint praise. The critical tide now seems to be ebbing even further, and I am waiting for Comic Book Guy from The Simpsons to weigh in with a verdict of "Worst. Upgrade. Ever."

Among the latest to put on his hobnails and do a little dance on Vista is blogger and former Deutsche Bank hedge fund manager Roger Ehrenberg. His less-than-concise (4,000 words) eulogy on Microsoft's and Vista's shortcomings was posted on Monday at www.informationarbitrage.com.

For those of you who don't have a spare hour to read it, in addition to some reasonable criticism of Vista's shortcomings, Roger says that Microsoft is not handling the launch well from a publicity perspective, that Bill Gates is coming across as geekish and insecure, and is in need of a good lesson in media training.

Comparing Microsoft's founder with Steve Jobs, CEO of Apple, he says "Steve is a rock star. Bill looks as if he's been living under a rock."

Nice line, but is it useful as an investment thesis? In 1986 Steve was as charming as he is now, and Bill was even more badly dressed and with a worse haircut. AAPL is up a respectable 9000% since 1986, while Microsoft is up about 30,000%. Further, aside from Windows 3.0 and Windows 95, none of Microsoft's Operating System upgrades have been particularly well received by the reviewers.

That lack of "rock star" charisma from its leader and mediocre product reviews have combined to give MSFT 97% market share in the desktop arena and made it the world's biggest and most profitable software company.

It is always dangerous to apply the "would I buy it?" test to any given product. I'm not really the addressable market for most high-end shampoos (the picture you see on my column actually overstates my follicle count) nor do I have any interest in the virtual world Second Life or dating service Lavalife.

But I am dead on the target market for Vista. I have several computers, all more or less becoming obsolete. I have budgeted buying a new PC sometime in the next 12 months, so I am looking hard at how useful Vista really is.

The answer, interestingly enough, is "not very." Almost all the features that Bill Gates is hyping are irrelevant to me (the Aero interface) or unproven (enhanced security will only be determined by letting hackers do their best over the next year.)

But I think MSFT is about to be the beneficiary of two very clear technology forces -- they are positioned in the sweet spot of a technological Perfect Storm.

As I have written about previously, the incredibly clever engineers at Intel and AMD are doing a great job of inventing very fast, powerful, energy-efficient multicore chips. They are so good at it -- and the two companies are so keen to grow their market share -- that they are beating each others' brains out on price. For years now CPUs have represented about US$200-US$250 of a PC's cost, but in 2007 that number will be closer to US$100.

Meanwhile, another significant component of PC pricing has been the LCD monitor. On Monday of this week iSuppli released the happy news (only if you are a consumer) that LCD monitor prices fell 4% to 6% in January. That isn't year-over-year? that is versus December. Instead of paying US$250 for a high quality 17," consumers are paying US$150 or less.

With the +US$200 that I can save on my CPU and my monitor, I will almost certainly buy Vista. Not because it is wonderful software, but because MSFT is a monopoly and I want my PC to be able to talk with everyone else in the world's PC. I am only spending money I have already allocated.

On top of which MSFT is trading at a reasonable 17 times June, 2008 earnings, it has 26% profit margins, 30% ROE, and US$26- billion in cash. Over the last 4+ years it has bounced between US$24 and US$30, and looks like it is about to break out of that range to the upside.

I have no illusions that MSFT will do anything great with Xbox or with Zune. Vista is uncompelling software, and the public faces of the company are nothing like rock stars. But because Intel and AMD are locked in a murderous rivalry, I think that a pair trade of buying MSFT and shorting either of INTC or AMD will yield about 20% over the next nine months.

[e-mail]

- - -

- Duncan Stewart is a former buy-side portfolio manager and sell-side research analyst and has been following technology stocks since 1990. He may hold positions in the stocks mentioned.

http://www.canada.com/nationalpost/financialpost/investing/story.html?id=ac0bbab4-47d2-4a12-b44c-d23e2b87cdcb

© National Post 2007

[杨子]

Window的版本太多了，人们已经疲了；

INTEL从去年4月到现在，已经发布了3.5代的CPU;
过去八年也才发布了两代。

INTEL和AMD过去12月把价格减了64%，和汽车增长了18%，怎么比？
AMD在下周一又要减价！减吧，收入顶不上贷款的利息。42元跌到16元。在减下去，四月或六月，股票非跌倒10元不可。

我的有些机器还在用Window 98, 有的还在用Window server 2000
过去七年没有买过新的OS----微软一定气死了。这次本来要全部更新为VISTA,从去年的11月就开始用B-ver来试，好多机器都不行。当然新的机器没问题。

VISTA本身应当说不错，只是要很多内存和显示存储空间，否则真是慢如牛。

我喜欢它的界面，很清洁。一目了然。

我想四月份开始，90%的DRIVER应当就会好了。这两天我发现每天都有大量的DRIVERS在网上出现。是好事。

谢谢，这些搞财经的，提醒人们不要以为跟风，浪费钱财。

够用就好了。