How Can Investors Play Both Sides of the Microsoft Vista Debacle?

Posted on Friday, March 14, 2008 7:12 PM

Computers are an integral part of our life and, if they work properly, they can save us a lot of work. If they work improperly, however, it can be a head-pounding, grief-filled experience. If you are one of the people out there who gets frustrated with computers because they do things and you don't know why, let me tell you a little secret: you are not alone. Even those of us who know computers and are "experts" have machines do things that they should not. We just know that sometimes it is the software and not the operator. Integral to every computer is the operating system. It is one of the most important pieces of software on your computer. Without an operating system, your computer is little more and a slickly-designed paperweight. So, when Microsoft comes out with a new operating system, it is big business for the computer industry. But Vista has been a big flop. I have a theory on Windows operating systems: every other one is a flop. Now, Microsoft basically invented the desktop operating system. The company wrote DOS for the first desktop computer, so writing an operating system was not new to them. The first version of Windows was a flop, but then Windows 3.1 was a huge success. Windows 95 was a flop and Windows 98SE was very good. Windows Millennium was undependable and Windows XP was very stable. Windows Vista is a flop so far, and I am guessing the next operating system will be better. As a consumer of operating systems, it pays to let other people go on before you. Let them work all the bugs out and be a late adapter. I remember when Windows XP came out. I was an early adapter, running the operating system before anyone else could even buy it. It was great to have the inside scoop on it, even if I was enticed with several free copies as part of the retail distribution promotions. But when I installed the system, it worked great and even reduced my system reboots from every day to once a week. (What a way to measure success!) And when everyone else came into the store, I told them what I thought of the new system and sold quite a few copies. Knowing that operating systems flop and not getting free copies this time, I have held off on upgrading, and I am glad I did. There are too many driver issues with Vista, and there has been a huge fiasco with labeling computers "Vista ready" and "Vista capable" when those machines are not. I asked a couple of guys in the office about Vista recently and they both starting telling me horror stories about printers not working and home networks crashing, all because of Vista. With all those bugs, it is not worth upgrading. So what does this mean for Microsoft? First of all, Microsoft is not going to go out of business. Operating systems are more or less a natural monopoly and most consumers will either use XP or Vista. Yes; you could use Linux or buy a Mac, but most consumers are not going to bother. There are certain things like power companies, cable companies, and water companies where standardization benefits everyone. As a society, it would be crazy to run two sets of pipes to every house so that we could have a choice from whom we buy our water. As we come to the conclusion of the HD-DVD and Blu-Ray war, consumers are glad to see a standard format. Standardization makes our lives much easier and there is no way Microsoft is about to lose its grasp of the home computer software market. It is possible, and that possibility will help drive the company forward and keep it on its toes, but it can push back the release date 17 times, screw up half the time and cause people massive headaches through security holes, devices that don't work, or virus outbreaks, and we will still use its software. Maybe one shouldn't slam Microsoft too hard. I am not a computer programmer, but I don't think I could write a software program better than them. Writing an operating program is a huge task. Getting it to work with different hardware, software, and networks is a daunting task, and it all must be done before the hardware or code is obsolete. I am sure we could get a political candidate to run for office on the basis of nationalizing computer operating systems and having a task force meet and write an operating system for all citizens to use. I seriously doubt that we would be any better; just look at the post office. In fact, I would bet it would be much worse. But that means Microsoft is in a good position. We can't live with and we can't live without the software. This means that no matter what, Microsoft is going to get lots of money from us on operating licenses for XP or Vista, but if the new product is not compelling enough to get us to upgrade, it will forgo potential revenue it could have made. We are still going to upgrade our computers every 2-5 years, but without compelling stories and dramatic improvements, those of us who have a choice in upgrading can delay it as long as possible. So that means there is significant pressure keeping Microsoft stock in a range. It is still getting a lot of basic revenue and it is missing out on potential revenue because Vista is not compelling voluntary upgrades. Microsoft stock will still rise and fall with the general market. For example, the stock has ranged between 28 and 36 over the past year, but those rises and falls have been with the general market. If the economy enters a recession, there will be fewer people buying new computers and less revenue for Microsoft. So, as an options investor, one could probably do a bull-put credit spread or a bear-call credit spread on the stock without a problem. I am sure some might even want to play both sides with an Iron Condor. You would want to get above the resistance level or below the support level of the stock. Looking for a short-term trade, the April bullish trade looks better than the bearish trade to me. I think the market may have hit a short-term bottom. The technicals for MSFT ($28.90 up 0.27) are bearish, with a possible trend reversal. The stock is under distribution with long-term support at 27. Look at the April 26/24 bull-put spread for a 20 cent credit. That's an 11.1% return and the stock has to fall 10.0% to cause a problem. Another trade on Microsoft that makes a lot of sense right now is a covered call. The October 28 covered call has a 9.9% return. Buy the Microsoft stock at 28.62 then sell the 28 call (MSQ JB) for 3.15, pulling in a 9.9% return with 11.1% downside protection over the next 219 days. As much as I wish I had a magical wand that fixed all computers, I still have to work in the real world. The best I can do is hold off on upgrading until Microsoft comes out with a better operating system and use that information, combined with fundamental stock market conditions, to pick up a little cash from the Microsoft stock. The beauty of options investing is you can build a trade that will help you maximize potential profits from fundamentally issues affecting the company. Happy Investing.