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Microsoft: Bernstein Ups Target; Upbeat On Windows On ARM

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Microsoft is shaking up the old Wintel PC world with its plan to offer a version of Windows 8 for devices based ARM-based processors. In the process, the software giant could expand its reach. Bernstein Research, in a report this morning on the prospects for Windows on ARM written by a group of the firm's analysts, repeated their Outperform rating on Microsoft shares, while boosting their target on the stock to $37, from $34.

"Microsoft, by supporting ARM architectures for Windows 8, meaningfully modifies the current equilibrium of the Wintel ecosystem," Bernstein writes in the report. "In notebooks, we conclude that ARM devices will be about 10% cheaper; driving a significant acceleration in volume growth, but this is already embedded in the consensus estimates. Assuming ARM keeps a structural cost advantage of this order of magnitude, the technology could capture 60% of the sub-$500 consumer market. This nevertheless remains uncertain, as x86 players could adjust their pricing strategy and improve the power efficiency of their products."

The real opportunity could be in tablets.

"In tablets, our analysis suggests that Windows 8 products will likely be more expensive than Android ones," Bernstein's analyst contend. "Therefore, if based purely on price, we see limited penetration in that segment and remain doubtful on the market share Windows can build alongside Apple and Android. However, a compelling Windows on ARM or Wintel implementation for tablets could drive higher Windows' share in the tablet market, plus incremental tablet unit growth. Given forthcoming additional details at the upcoming Windows 8 beta launch, we see potential for upside."

The prospects for the success for Windows on ARM get a boost with the company's plan to offer a new version of Office designed for Windows 8, Bernstein asserts, while adding that there is also good development support for new Metro style apps, and that the company is working with developers to re-compile existing apps to run on ARM.

"For Microsoft, a successful Windows on ARM ecosystem helps defend the threats from tablets, and also expands the addressable market to tablets, new form factors and via growth in low end devices," Bernstein contends. "However, even if WOA is not as successful, Microsoft still stands a chance to play in the tablet market with the x86 systems. We also note that a potential bundling of Office into WOA devices only could drive the price of WOA devices higher, but in this case the Microsoft Business Division segment would see some revenue headwind."

Adds Bernstein: "We believe that a successful launch of Windows 8, especially WOA, helps disprove the bear case that Windows is going off a cliff."

MSFT this morning is down 7 cents, or 0.2%, to $31.22.