Will Vista be big deal or ho-hum?

By Matt Krantz

To promote next week's release of its Windows Vista operating system to consumers, Microsoft is using the tag line "The Wow starts now." But on Wall Street, the wow started more like six months ago.

Investors anticipating the wide release of the latest update to the world's most-popular operating system have already bid up shares of many related stocks, especially makers of high-end graphics cards and Microsoft (MSFT) itself.

That's leaving investors and analysts torn if there are still ways to profit from Vista's launch and how long it'll take before the upgrade moves the needle in the behemoth personal computer market.

"It has the chance to boost PC sales this year a little," says Alan Davis, analyst at D.A. Davidson, pointing out the key will be how Vista sells relative to investors' expectations. "Will it have legs?"

Investors appear to think so. Shares of 30-year-old Microsoft have regained some of their youthful kick leading up to the Vista release. After being trapped between $22 and $30 a share for about five years, the stock has perked up and has gained 43% from its low last year in June and 29% in the past six months. The stock Tuesday rose 2 cents to $30.74.

And while investors expect Microsoft to report 29% lower fiscal second-quarter earnings this week, they're looking for 43% growth in the current quarter, 14% for this fiscal year and 16% growth next fiscal year, Thomson Financial says.

"Vista's been the thing to get Microsoft (stock) out of its funk," says Brendan Barnicle at Pacific Crest Securities. "The anticipation is what's been moving the stock."

Is Vista what Microsoft needs to steal mojo back from Google and Apple? Analysts fall into two distinct camps:

  • Yes. It's still a huge deal. A new operating system from Microsoft is a "big thing" for tech firms for years, says Kevin Landis, portfolio manager at Firsthand funds.

Vista and the new version of Office will showcase how Microsoft has invested to fill its pipeline with new products, ranging from the Xbox 360 video game console to Live online services, says Jason Kraft at Susquehanna Financial.

And he thinks the stock price is reasonable. It's trading for 21 times its expected earnings for its fiscal year ended June 2007, vs. 16 times for the Standard & Poor's 500.

Landis adds investors often underestimate how a new operating system creates demand for all sorts of tech products. "I agree it's an upgrade not that different from other upgrades," he says. "But upgrades in the past have been important."

Consumers and businesses must beef up their systems in several areas, especially memory and graphics, to run Vista.

He thinks memory makers could benefit because Vista machines need twice if not quadruple the memory many have now. Also, consumers looking to turbocharge their computers may buy high-end microprocessors from Intel and Advanced Micro Devices, he says.

The rush to upgrade is just beginning, says Barbara Walchli, portfolio manager of the Aquila Rocky Mountain Equity fund. She says Vista will reinvigorate the need to boost PCs' power. To use Vista's slick graphical interface, users need a sophisticated graphics card. Shares of one of the leading makers of such cards, Nvidia, soared 79% the past six months.

  • No. The Vista effect is negligible or already priced in. If Vista inspires any increase in PC buying, it'll be fleeting, says Jim McGregor, analyst at In-Stat. The biggest boost could come this quarter from consumers who delayed buying a PC last year. Consumers holding out may explain why PC shipments were down roughly 2% in the fourth quarter, says Tara Hedlund at Turner Investment Partners.

But Hedlund says companies, which buy a large portion of Microsoft products, won't rush to buy Vista because they're very slow about major changes. She thinks the higher system requirements will act as more of a floor for computer memory demand than a catalyst for growth.

If anything, Vista could harm some tech companies, such as makers of computer security software, since Vista's security is expected to be stronger than previous versions.

Barnicle thinks history will be a guide: In eight of the last nine of Microsoft's operating system upgrades, the stock has gained ahead of the release then declined. "Microsoft is so big now ... a new product doesn't cause a big, real move."