Analyst Sees Windows 7 Pricing Data & Penetration Rates (MSFT, DELL, HPQ, YHOO)

Auriga is a boutique research firm that many have not heard of, but this morning the firm has reiterated its BUY rating on Microsoft Corporation (NASDAQ: MSFT) and its $33.50 price target after yesterday’s $27.88 closing bell price.  The reason for today’s call is that the firm obtained detailed Windows 7 pricing in as-sold models from Microsoft for six of the OEM companies from more than 100 PCs.  And the first weeks of data may offer more insight than any official price target on overall market penetration rates. Particularly when you compare the data to other outside and independent research for overall Windows 7 penetration rates.

China was excluded (partly over piracy rates), but included form factors, price points, and major regions with high sell-through rates.  Auriga noted that Windows 7 is included on 65% of the PCs it analyzed, and that should move higher in the next six months. Also noted was that Dell Inc. (NASDAQ: DELL) and Hewlett-Packard (NYSE: HPQ) are charging $30 more for netbook upgrades to Win7 Starter Edition and $50 Win7 Home Premium and those two have been very fast to inject Windows 7 into their machines. One note that stood out was that netbook penetration is lower than expected at 28%.

There are modest updates to the estimates.  It is adding $200 million to operating expense expectations related to the Yahoo! Inc. (NASDAQ: YHOO) search pact.  The firm also lowered its fiscal 2010 earnings estimates to $1.90 EPS from $1.92 EPS, but that is above $1.82 consensus.  The Fiscal-2011 earnings estimates are unchanged at $2.12 EPS versus consensus estimates of $2.04 EPS.  Lastly, Auriga noted that its $33.50 price target reflects a P/E multiple of 17.3-times the firms own 2010 EPS target and equates to a 2010 Enterprise value ratio to free cash flow of 13-times.

Our main take here on the Auriga note has actually little to do with the “buy rating and $33.50 target.”  The interest is in the Windows 7 expectations and penetration rates.  It is interesting that the penetration is still this low in netbooks, but it might also be worth considering that many of the netbooks that will be sent out for Christmas are just now being shipped and those would either include an optional load or upgrade that might have a higher penetration rate.

In an entirely different report not tied at all to Auriga, StatCounter has reported that Windows 7 has had an encouraging start in the US and globally.  It noted that the Windows 7 weekly share went from 1.75% of the US market pre-launch to 2.82% by the end of October.  The news was positive for Microsoft with market share increasing to the same levels globally.

Also, CNET noted yesterday that more than 3% of PCs accessing the Web in the past two days did so using Windows 7, although it noted that Windows 7 already accounted for 2% of global Web traffic in the days ahead of its formal launch.

Jon C. Ogg
November 3, 2009