The article was written by Motek Moyen Research Seeking Alpha’s #1 Writer on Long Ideas and #2 in Technology  – Senior Analyst at I Know First. 

Microsoft Stock Forecast: Why Microsoft Must Accelerate Development Of Windows Core OS

Summary:

• The number of Windows 10 global users has surpassed Windows 7 users.
• However, Microsoft will still fail to meet its self-imposed deadline of 1 billion Windows 10 devices by mid-2018.
• Android is now the world’s dominant operating system. The development of Microsoft’s operating system, Windows Core, should be accelerated.
• Only a better version of a Windows operating system can help Microsoft regain its former status as the leader in operating systems.
• Profit taking is now recommended on MSFT. The stock is notably above my $85 12-month price target, which I did last September.

It might be a good time to offload Microsoft (MSFT) shares right now while it trades above $90. I do not see any major catalyst that can boost the stock above $95. The report that there are now more people using Windows 10 than Windows 7 is not enough to inspire MSFT bulls. Yes, Windows 10 users now accounts for more than 42% global, while Windows 7 users now only account for 41%.

(Source: Global StatCounter)

On the other hand, I am sure Microsoft will still miss its self-imposed deadline of 1 billion Windows 10 devices by mid-2018. As of November 2017, there were only more than 600 million Windows 10 users. A backlash from bears harping about Windows 10’s struggle could affect the stock performance this year. The strong resistance of Windows 7 users is a strong hint of a widespread dissatisfaction over Windows 10.  Microsoft needs to release a better version of its operating system to help convince Windows 7 hold-outs to upgrade.

Further, Microsoft’s handicapping of Win32 app emulation on Windows 10 on ARM could lead to consumers, software developers, and PC manufacturers to ignore upcoming ARM-based Cellular PCs. ARM-based Cellular PCs was supposed to boost Windows PC sales between now and the July/August back-to-school season. An ARM-based Windows 10 cellular PC with severe win32 app emulation is going to be a commercial flop. Very few people will buy an ARM-based Windows 10 laptop/computer if it cannot work with PC peripherals such as printers, scanners, webcams, and pen/digitizers. Microsoft is now requiring third-party developers and manufacturers to port their x86/x64 device drivers to ARM64 if they want their software to be properly emulated on Windows 10 ARM computers. Not many will do this due to expense/time consideration.

Microsoft also hammered in the last nail to the coffin of Windows 10/Phone mobile. Microsoft already stopped push notifications on Windows Phone 7 and 8 devices. Windows 10 Mobile handsets will soon probably get the same treatment. Microsoft’s quick exit from mobile phones means the number of Windows 10 active users will probably max out at 800 million by end of 2018. Without the original plan of selling 50 million Windows Phones annually, Microsoft is not going to hit 1 billion devices by mid-2018.

Windows Core OS Could Fix This

Microsoft can only hit the target of 1 billion devices by end of 2018 if it can release its long-rumored Windows Core Operating System [WCOS] now. It is unlikely to happen. However, Windows Core is the project to make Microsoft’s operating system modular and lightweight. Device manufacturers can strip down Windows Core OS versions for tailor-made implementations on different compute devices.

My understanding is that WCOS will come with composers like “Polaris” which can be adopted for traditional desktop/laptop. “Andromeda” will be the mobile shell, “Oasis” for mixed reality/VR products, and “Aruba” for touchscreen tablet/laptop hybrids.

(Source: Windows Central)

More people will be inclined to buy Windows laptops or mini-computers if they do not come with the full bloatware of Windows 10. Windows’ biggest disadvantage is it got too complicated and too CPU/RAM-dependent.  A tablet that is only going to be used for email and web surfing doesn’t need the whole 20GB-30GB installation of Windows 10.

More PC and tablet manufacturers will likely shift to making Windows tablet products than Android if they can get hands on a more modular/lightweight Windows operating system.

Why Microsoft Still Needs More People Using Windows Than Android Devices

The importance of Microsoft convincing more people to use Windows compute devices will greatly determine how many people will pay for its cloud/subscription services.  Microsoft now has over 120 million business users of Office 365, but I believe many of those are using iOS/Android devices. Maximizing monetization of people paying for Microsoft services might be better if they also bought Windows OS hardware

Further, Nadella might have taken a device-agnostic approach to Office 365, Skype, OneDrive, and other freemium Microsoft apps. However, it is still easier to track user statistics of paying and free users of Office 365 and Skype if they are using Windows devices. Microsoft needs a bigger database of personal data and online habits to help improve its mobile/search advertising business.

I do not think Apple (AAPL) or Google (GOOG) will allow Microsoft to get full access to the user data of Android phone/tablet users who use Microsoft mobile apps. Lastly, issues over compatibility and performance speed will likely be minimized if Microsoft’s commercial apps and services are being used/accessed via Windows OS devices. Try it yourself, run Office 365 on a Windows 10 tablet and compare its performance when you use it on the iPad or Android tablet. Non-Windows devices always lag behind in overall performance.

Final Thoughts

MSFT has long breached my original $85 12-month PT for it that I posted last September. You can hold on to some of your shares but it is time to do some profit-taking. Go long on it again when the price drops below $85. My sell recommendation for MSFT is in line with the recent bearish algorithmic market trend forecasts from I Know First.

Microsoft’s stock has negative algorithmic signals for the 30-day, 90-day, and one-year forecasts.

Past I Know First Forecast Success with MSFT

I Know First’s algorithm has made accurate predictions on MSFT in the past, such as its bullish article published on September 27, 2017 In the article, it explains that Microsoft was revising its Skype for Business collaboration app and is integrating LinkedIn on Office 365, completed their 4,000-mile 160-terabits-per-second undersea cable in the Atlantic Ocean and was leveraging its Artifical Intelligence assets to build a new healthcare division. I Know First’s algorithm predicted a signal of 48.68 and predictability of 0.53.

Since September 27, 2016, until September 27, 2017, MSFT shares increased by 23.18 % in line with the I Know First algorithm’s forecast.

I Know First Algorithm Heatmap Explanation

The sign of the signal tells in which direction the asset price is expected to go (positive = to go up = Long, negative = to drop = Short position), the signal strength is related to the magnitude of the expected return and is used for ranking purposes of the investment opportunities.

Predictability is the actual fitness function being optimized every day, and can be simplified explained as the correlation based quality measure of the signal. This is a unique indicator of the I Know First algorithm. This allows users to separate and focus on the most predictable assets according to the algorithm. Ranging between -1 and 1, one should focus on predictability levels significantly above 0 in order to fill confident about/trust the signal.