Prudential Securities Inc analyst John McPeake says investors who unloaded Microsoft Corp shares today made a mistake.
McPeake said he's betting that many people shed the stock because Dell Computer Corp last night said personal computer sales will be flat or may even fall 5 percent this quarter from last quarter. Microsoft shares opened lower and fell as much as 4.8 percent.
Dell is the largest maker of PCs. Microsoft's operating system is used on more than 90 percent of PCs. So, it makes sense that investors would sell Microsoft shares if Dell says computer demand is stalling. What some investors are missing is that Dell's forecast is actually more positive than Microsoft's own predictions, McPeake said.
"A misread of Dell's earnings report may cause weakness in Microsoft shares," the Prudential analyst said in an interview.
"We would use that as a buying opportunity."
The way McPeake sees it, if desktop software sales rise 0.6 percent year-to-year -- a figure he extrapolated from Microsoft's outlook offered on July 19 -- then the number of personal computers being sold would fall 7 percent from last quarter to the current quarter. That's two points better than Dell's worst-case scenario.
Dell's forecast that PC demand won't pick up until ``spring of next year'' has also caused some confusion, McPeake said.
While that may be true for Dell, it won't necessarily be true for other computer makers, the 36-year old analyst said.
That's because Dell relies mostly on sales to businesses, which have cut capital spending as the U.S. economy has slowed.
Dell Computer only gets 15 percent of its revenue from sales of personal computers to consumers, McPeake said, while Microsoft gets 35 percent to 40 percent of its desktop software revenue from consumers who buy personal computers.
McPeake said he expects those consumers to buy more computers after Oct. 25, when Microsoft releases its new Windows XP operating system.
The analyst said investors should snatch them up to avoid missing three catalysts that could boost Microsoft's stock by 39 percent in the next 12 months: the release of Windows XP; the launch of the Xbox video-game system on Nov. 8; and a rush by commercial customers to take advantage of discounts on software upgrades before a Feb. 28 deadline.
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