How much do you think the 100 million Windows 8 shipment press release is worth? Some outspoken critics have been giving a lot of grief over Microsoft Corporation’s (NASDAQ:MSFT) press release, with the strongest critic, Patrick Seitz from Investor Business Daily, stating:
Microsoft is crowing about reaching 100 million Windows 8 licenses sold in roughly the first six months of availability. But the numbers aren’t as rosy as Microsoft is making them out to be. That doesn’t mean that 100 million Windows 8 PCs have been sold and are in use. Microsoft counts a Windows sale whenever a PC manufacturer ships a new computer. So, a good number of those PCs are likely still in the sales channel. Also, many of those PCs sold to businesses were downgraded to Windows 7.
Here’s the fallacy of that logic–the author failed to mention how long a Windows PC remains in the distribution channel. While Microsoft Corporation’s (NASDAQ:MSFT)’s recognition of sales may be a problem, a bigger problem lies in the way this critic laid out his thesis.
Source: YCharts
The days in inventory outstanding formula measures the average amount of days it takes for a firm to sell inventory. The calculation is the average inventory/cost of goods sold. The reason this formula works is that it takes the total cost of inventory on an annualized basis and divides by the amount of inventory the firm has. It can accurately estimate the average amount of days it takes for a firm to clear out its inventory.
In the above figure, Best Buy Co., Inc. (NYSE:BBY) is able to sell its entire inventory within 51 days on average. Dell Inc. (NASDAQ:DELL) is able to sell its inventory in 11 days before having to re-stock, and Hewlett-Packard Company (NYSE:HPQ) is able to sell its inventory in 26.28 days, just under a month.
Implications for the PC industry
I believe Microsoft Corporation’s (NASDAQ:MSFT) has every right to be optimistic. Hewlett-Packard Company (NYSE:HPQ) and Dell Inc. (NASDAQ:DELL) saw no increase in the amount of inventory laying around, despite the Windows 8 launch, and even Best Buy was able to decrease the inventory levels, all while Microsoft was able to increase sales from its Windows segment by 23% year-over-year in the first quarter. Seasonal demand is the weakest in the first quarter of the year. Despite that, Microsoft Corporation’s (NASDAQ:MSFT) was able to post strong results from its Windows division in the weakest season of the year. This implies that the demand for Windows 8 was strong, and while consumers may not believe it, perhaps the Windows 8 is a much needed success for the PC industry.
Best Buy Co., Inc. (NYSE:BBY) may be able to sell additional computing devices, with the decline in inventory likely to keep investors optimistic of Best Buy Co., Inc. (NYSE:BBY)’s immediate future. Best Buy has been able to stage a 23% rally in the price of its stock since the beginning of the year. In its fourth quarter earnings announcement Best Buy Co., Inc. (NYSE:BBY) stated that computing and mobile phones saw a 7% year-over-year growth in revenues, implying that the Windows computer may have more demand than what analysts were anticipating. Not to mention the fact that Best Buy Co., Inc. (NYSE:BBY) reported a loss of $1.31 earnings per share in the previous year. Analysts on a consensus basis anticipate Best Buy Co., Inc. (NYSE:BBY) to turn around losses, with a profit of $2.19 per share in the current fiscal year. The company’s return to profitability will be driven by cost-cutting. This can be easily accomplished by cutting down on the number of stores.
While the marginal benefit experienced from a Windows 8 may be limited, at the very least we guys have a legitimate excuse to upgrade our computer without our wives screaming at us for once.
Buy Hewlett-Packard
Hewlett-Packard Company (NYSE:HPQ) has reported some losses due to the impairments it had to record. An impairment is a paper loss on the value of its assets.
Hewlett-Packard Company (NYSE:HPQ) had to report these losses on the income statement, which resulted in the negative earnings per share. On the bright side, Hewlett-Packard generates $10.57 billion in cash from its operations. Also, the losses that have been realized will not be realized in future accounting periods.
Analysts on a consensus basis anticipate Hewlett-Packard Company (NYSE:HPQ) to report a profit of $3.49 per share. Hewlett-Packard’s current EPS is negative $6.41. This implies that investors are paying a 6.2 future earnings multiple, assuming Hewlett-Packard is able to report earnings at $3.49. This is downright cheap in light of the desktop refresh cycle brought on by the Windows 8.
Conclusion
The skeptics have had their field day with Microsoft Corporation’s (NASDAQ:MSFT) and its eco-system. But as the data clearly points out, the 100 million Windows units sold is actually favorable for Microsoft, despite what the critics say.
Perhaps Hewlett-Packard Company (NYSE:HPQ) can turn the corner on its declining revenues by focusing on value-added services while absorbing the benefits of a PC refresh cycle brought on by the Windows 8. The personal computer isn’t dead, and Microsoft Corporation’s (NASDAQ:MSFT) isn’t a beached whale whale just yet.
The article Windows 8 Was A Financial Success originally appeared on Fool.com and is written by Alexander Cho.
Alexander Cho has no position in any stocks mentioned. The Motley Fool owns shares of Microsoft.
