Microsoft Corporation (MSFT): Surface Won’t Fly, Says Analyst

Microsoft Corporation (NASDAQ:MSFT) is just days away from unleashing its new proprietary tablet computer, the Surface, to store shelves for loyal but patient Windows customers, who also will have the opportunity to see the new Windows 8 operating system up close. But with its entry into the tablet space – at least a year behind most other top competitors – an analyst at Sterne Agee filed a note this week that had less than flattering projections about the Surface.

In response to a report that Microsoft Corporation (NASDAQ:MSFT) was going to sell its entry-level tablet at $499 (without the Touch Cover) – making it competitive with the iPad from Apple Inc. (NASDAQ:AAPL) – Sterne Agee analyst Shaw Wu sent a note to investors this week making a claim that Microsoft Corporation (NASDAQ:MSFT) is setting itself up for failure in the tablet space due to its high price for an unproven device. In Wu’s note, he wrote, “Surface’s high pricing could prove to be a fatal mistake and relegate it to be a niche No. 4 or No. 5 player. We believe Nexus 7 and Kindle Fire HD will likely see considerably higher volume given their low $199 price points and stronger ecosystems with iPad retaining its commanding No. 1 position.”

Wu went on to say that in his judgement, Microsoft Corporation (NASDAQ:MSFT) should be listing the Surface at about $300 with the Touch Cover included, in order to make its brand-new device to be competitive with the Nexus 7 by Google Inc. (NASDAQ:GOOG), the Kindle Fire by Amazon.com Inc. (NASDAQ:AMZN) on the lower end and the iPad by Apple Inc. (NASDAQ:AAPL) on the high end. He also claimed that because of the Surface being in the market, Microsoft Corporation (NASDAQ:MSFT) risks taking some sales away from some of its Windows partners like Acer, Dell Inc. (NASDAQ:DELL) and Hewlett-Packard Company (NYSE:HPQ). That, combined with Microsoft Corporation (MSFT) ordering just 2-3 million Surface devices, and Wu says he company could be in some tough positions during the holiday season.

If Wu is right, this might lead to very depressed Windows sales for Microsoft Corporation (NASDAQ:MSFT), which can certainly affect investors perceptions, including billionaire fund manager David Einhorn of Greenlight Capital.