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New Products Could Make Microsoft a Tech Competitor Again


The company's efforts in search engines, video games, and the upcoming Windows Phone 7 OS could stimulate EPS growth once again.

As of late, Meh-crosoft has been a more suitable name for Microsoft (MSFT). Steve Jobs and Apple (AAPL) have long since taken the gloss off the House That Gates Built. The buzz over Windows 7 has largely subsided. One could almost view the stock as a bond, given its decently sized dividend. Nothing really moves Microsoft; there's not a lot of action after Windows 7.

If IBM (IBM) is Big Blue then Microsoft is Big Green; once the number-one bread winner, Microsoft's bread is now stale and moldy. But the winds are a-changing. Microsoft has its hand in everything once again, from search engines to video games to the upcoming Windows Phone 7 OS.

It's said that when you defend everything, you defend nothing. That is, when you try to do too many things at once, you end up doing nothing because you're spread too thin. I think Microsoft is finally defending just enough. It's got a trim operating system, and a leaked screenshot of Internet Explorer 9 suggests a bare-bones browser comparable to Google's (GOOG) Chrome.

Of course Microsoft can't compete with momentum growth stocks such as Salesforce (CRM) and Netflix (NFLX). However, Microsoft finally has a bunch of projects that can steal a little bit of market share from everywhere. Perhaps the company can tighten the gaps and begin to resemble something closer to a company with growth prospects.

If the Windows Phone 7 does well it could capture 5% of the smartphone market. Given that smartphones currently only account for about 20% of phone users, a small market share in a growth market could eventually mean comparable sales numbers to that of Apple's when smartphones have 60% or 70% market share.

So if Microsoft could put up Apple numbers, could it also compete with Google? Reviewers' sentiment is that Google is reinventing the wheel with its new search optimization dubbed "Instant." To be fair, I remember thinking Facebook was reinventing the wheel with its instant status concept. And that was my bad.

That's where Bing comes in. Microsoft has a five-year contract with AOL (AOL) search, and although AOL's Web market share is puny compared to Google, it's something. Just yesterday a report from Nielsen showed that Bing surpassed Yahoo (YHOO) for the number-two search engine spot. Bing now has 13.9% of the search market, with Yahoo trailing behind on 13.1%.

Phones are now coming pre-loaded with Bing search and Verizon (VZ) is suspected of adopting Bing for all its Android devices in the future. I wouldn't exclude the possibility of Bing being the exclusive search engine in the Verizon iPhone lineup. The iPhone4 is still one of the hottest mobile devices out there, and if Bing was a correlated upsell, it could be a huge win for Microsoft.

However, the most important prospect for Microsoft would have to be the Xbox/Halo marriage. Although Xbox is more of the icing on the cake, the Halo series is arguably the most successful game franchise since Final Fantasy. Revenue estimates for Reach, the latest Halo installment, are around $2 billion worldwide. Triple the sales of Halo 2 and Halo 3. That's not terrible.

Another interesting observation is that Microsoft's stock is close to where it was this time a year ago, before the Windows 7 release. Halo doesn't have the profit potential an operating system does, but if the Windows phone gets released on schedule (October for Europe, November for the US), we could see Microsoft climb.

If you take one thing away from this analysis, it's that Microsoft wasn't really ever down, and it's definitely not out. It's got enough components in its portfolio of new products to add 20%-30% to its bottom-line sales figure. Microsoft is definitely worth a second glance.

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No positions in stocks mentioned.
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