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Halo Is Only a Start to Microsoft's Upside


Although Halo will no doubt be a huge deal for Microsoft, the bigger picture is playing itself out right before our eyes.

"This is ground control to Major Tom, you've really made the grade
And the papers want to know whose shirts you wear
Now it's time to leave the capsule if you dare"

Space Oddity - David Bowie

Never was a huge Bowie guy - but there are a couple of songs that I can listen to. But Space Oddity was one of those songs that tells a story and forces your imagination to work overtime. Not unlike the latest roll out by Microsoft (MSFT) - Halo 3. Master Chief, The Prophet of Truth, The Arbiter, sounds more like a WWE presentation than the most highly anticipated video game of all time... But truth be told, you have a better chance of me predicting tomorrow's winning Mega Millions lottery numbers than me providing any further information on Halo 1, 2 or 3 as the next time I play Xbox will be my first. Galaga was the last new release that I got fired up about - so I am not exactly Microsoft's "target audience".

But for today at least, the release of Halo 3 will be the big news surrounding Microsoft. And although I have no doubt this is a huge deal for Microsoft, I think the bigger picture is playing itself out right before our eyes.

On September 20th, Morgan Stanley (MS) raised their PC unit forecast to 13% from 9% citing the better than anticipated strength in non-US markets. On September 11th, Bear Stearns (BSC) raised its 3rd quarter PC shipment forecast to 25% sequentially from 21%. Bear cited growth in consumer and emerging markets. And just today, Dell (DELL) announced a partnership with GOME Stores for retail sales in China. The bottom line appears to be the most robust PC demand in recent memory.

As Barron's pointed out in their Technology Trader on September 16th, although Microsoft is a complicated company with a lot of moving parts, a good portion of its revenues and profits are still tied to PC sales. There is no denying the strength on the PC front and I think Microsoft will win to this when it reports its 1st quarter on or about October 25th. The Street is looking for $0.39 EPS on about $12.52 bln in revenues and I would not be surprised in the least to see the company blow away those estimates. The stock has flirted with $32 a couple of times this year, once in mid January and again in July, only to fail and be sold off both times. I think the stock is setting up nicely to take out the $32 level and I feel, to borrow a phrase from The Lone Wolf Jeff Macke, "what was resistance at $32 will become support".

So although this Halo 3 is a huge deal for all the strong thumbed video game players out there, the real story at Microsoft may be staring you directly in the face!
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