October 18, 2015
Surface Book Proves Popular With Laptop Users, Can It Become New Microsoft, MSFT, Earnings Driver?

A sea change may be underway in the personal computing market that may be as fundamental, perhaps even more so, as the breathtaking switch consumers made from Blackberry (NASDAQ: BBRY) devices to the Apple Inc. (NASDAQ: AAPL) iPhone, iPod, and iPad, as reported by Fortune. This sea change is the Microsoft (NASDAQ: MSFT) Surface Book and the reaction of consumers.

Suddenly, tablets have an extended functional use. Sure, for games, photos, and videos, and many other purposes, iPods and Alphabet (NASDAQ: GOOG, GOOGL) Android devices are necessary, even desirable. But an Android or Apple device, even though it had the power to complete the tasks, was still being used by very few people as their sole computer. Laptops, made by both Apple and plethora of personal computer manufacturers, have remained a mainstay, perhaps somewhat out of necessity.

The Microsoft Surface Book is proving to be a hit!
Panos Panay, a Microsoft vice president, unveils the Surface Book. [Photo by Andrew Burton / Getty Images]Editing videos and writing stories about them is still easier on a QWERTY keyboard than with a touchscreen. Manipulating the great data that tablets and mobile devices generate has always taken a computer to do well.

The Surface Book changes this. It is a full-blown tablet that attaches to a standard QWERTY keyboard. It runs Windows 10, the very same system that most Microsoft users are probably running. Further, it's very similar to Windows 7 and 8.

The Surface Book runs all of the Microsoft applications to which computer users are accustomed, flawlessly. It represents the perfect bridge between the personal computer of the past and the personal computer of the future. Microsoft reports that the Surface Pro runs 50 percent faster than the comparable MacBook Air -- and it's a tablet. The MacBook Air is a bona fide laptop. The Surface Book represents a true paradigm shift in personal computing and consumers appear to be voting with their wallets.

The new Microsoft Surface Book replaces a laptop.
The Microsoft Surface Book unveiling on October 6. [Photo by Andrew Burton / Getty Images]Anyone in the market for a laptop can now choose a tablet and feel confident that they aren't making compromises on functionality to pander to a flavor of the month. The Surface Book is equivalent to a laptop, and more; it can be used as a tablet just as easily.

Demand for the Surface Book has been steady. Tech Crunch reports that the Microsoft website has been sold out at times since the new potentially disruptive laptop competitor was announced on October 6. The Surface Book officially launches on October 26 and there are wait times for many of the Surface Book versions and accessories. Microsoft is taking Surface Book pre-orders on its website, with prices reported to start at $1,499.

The Microsoft Surface Book runs Windows 10.
The Surface Book is seen as a legitimate laptop replacement. [Photo by Andrew Burton / Getty Images]Microsoft is expected to report its first quarter 2016 financial results on Thursday, October 22, after the market closes at 4 p.m. Wall Street consensus estimates are calling for MSFT EPS of $0.59 and revenues of $21.0 billion.

Over the past 90 days MSFT EPS estimates have been reduced from $0.65, by 9.2 percent. Full 2015-year MSFT EPS estimates have been taken down from $2.84 to $2.69 and 2016 views from $3.21 to $3.08, over the same time frame.

Analysts see Microsoft generating $91.1 billion in revenue in 2016 and growing that figure 7.2 percent to $98.5 billion in 2017.

EPS growth for Microsoft, judging by current estimates, is mediocre at best. Quarterly MSFT EPS growth of 9.3 percent is expected on Thursday and then 1.4 percent in the second quarter of the MSFT 2016 fiscal year. EPS growth of 9.3 percent is forecast for all of 2016 and then 14.5 percent in 2017. MSFT EPS growth of 8.2 percent annually over the coming five years is the consensus among analysts who publish Microsoft estimates.

Microst stock chart.
[Chart Courtesy of Venngage]Microsoft carried $93.6 billion in cash and owed $35.4 billion in debt, as of June 30. Microsoft maintains a healthy operating margin of 30.1 percent and a profit margin of 13.0 percent. Microsoft's return on equity is reported at 14.7 percent and debt to equity is reported to be 44.2 percent.

Perhaps, if Tech Crunch is right, and Microsoft did indeed "underestimate the demand" for the Surface Pro, the new laptop alternative could be adding to the Microsoft bottom line in the near future, as the iPod, and later iPhone, did to Apple's.

MSFT shares trade near 52-week highs. News of upside guidance has the potential to start a new stock rally and chapter in the Microsoft story.

[Feature Photo by Andrew Burton / Getty Images]