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Hard Slog Ahead for Microsoft?

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A Barclays analyst feels the company must find a new cash cow, and is taking a wait-and-see approach to Surface.

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MINYANVILLE ORIGINAL Equity analysts are often accused of having heard mentality, but Barclays Capital (NYSE:BCS) today bucks the trend where the world's biggest software company is concerned.

The bank's Raimo Lenschow is cutting his price target by $2 to $34, while maintaining a lukewarm overall rating of "Equal-Weight." Partially as a result, the Redmond, Washington, outfit is today awash in red ink, trading down more than 2% in an admittedly awful overall market. The researcher, well regarded and historically highly ranked in industry surveys by both Institutional Investor magazine and Thompson Reuters Starmine, thus breaks with several more optimistic peers. Citigroup (NYSE:C), Goldman Sachs (NYSE:GS), and Lenschow's ex-employer Bank of America-Merrill Lynch (NYSE:BAC) are all reiterating upbeat "Buy" ratings even after Microsoft (NASDAQ:MSFT) announced its quarterly profit tumbled 22%.

For its part, Barclays is opting "…to wait on the sidelines until after the Windows 8 launch next week." With fresh signs that the personal computer era is being consigned to the scrapheap, as also evidenced by this week's relatively weak results from both International Business Machines (NYSE:IBM) and Intel (NASDAQ:INTC), Microsoft must thus find a cash cow beyond its traditional desktop-based offerings.

Indeed, amid the clash of analyst calls, all agree that much is riding on next Friday's unveiling of its flagship product. The latest version takes increasing aim at the mobile and tablet markets, being literally more touchy-feely and less dependent on the traditional mice-and-keyboards of yore. With the number of smartphones now officially numbering one billion and Internet-enabled devices migrating to the cloud at a dizzying rate, Microsoft's next moves are critical. Some early signs offer encouragement, with pre-sales of Windows 8 already almost $800 million. This represents an improvement of about 40% on its predecessor. Competition is cutthroat however, not least from Google's (NASDAQ:GOOG) Android and Apple (NASDAQ:AAPL) iOS operating systems.

Meanwhile pricing for Microsoft's Surface tablet, also set to ship a week from today is in Lenschow's view, "…not significantly cheaper" compared with other offerings. And the likes of Amazon's (NASDAQ:AMZN) Kindle Fire already have a substantial head start. Shares in Microsoft, a company left for dead for a decade, showed signs of life earlier this year, rising to a multi-year peak in March. The upward run has since stalled, and the stock currently trades at a discount to most peers. For all the buzz that Bing, Skype, and Xbox bring to the table, the Windows PC and Office franchises still account for roughly 60% of the tech titan's revenue. Hence the upcoming product refresh will reveal whether the bear at Barclays, or more bullish analysts elsewhere, are right.

At around this exact hour a quarter-century ago many on Wall Street were contemplating jumping out of windows. Will investors leap into Windows 8? The answer will go a long way to determining whether or not this venerable tech titan has jumped the shark.
No positions in stocks mentioned.
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