2 companies poised to benefit from Microsoft's tablet
ARM Holdings and Cypress Semiconductor could get a bump from the new Surface.
Microsoft (MSFT) unveiled its Surface line of tablets late Monday, putting the company in competition with Apple's (AAPL) iPad, Google's (GOOG) Android operating system. (Microsoft owns and publishes TechBiz, an MSN Money site.)
Before the event, few details were known, as it was clouded in secrecy, with the event having come together just a few days before. Even the location of the event was not known until 10 a.m. PT on Monday, mere hours before the event began.
Microsoft did not release pricing details of the Windows 8 tablet, or when it would be available, though CEO Steve Ballmer did say it would be "competitive" in terms of price with other tablets on the market. The device is 9.3 millimeters thin, comes with USB 2.0 ports, a kickstand and its weight varies, depending on the chipset inside. It also comes with a keyboard, and a small cover that's held together by magnets, similar to Apple's SmartCover.
While it's unclear how well consumers will react to this device once it goes on sale, the tech blogosphere is already weighing in along with sell-side analysts who see this as somewhat of a positive development for Microsoft, assuming it can execute properly.
Here's a look at what's at stake for Microsoft, as well as how Cypress and ARM could benefit if the Surface takes off.
This is not Microsoft's first venture into hardware. It already makes keyboards, computer mouses, and the Xbox 360, but it does put Microsoft into direct competition with tablet makers, including Apple, which Deutsche Bank analyst Tom Ernst Jr. called a "step in the right direction."
Ernst noted that having control over both the hardware and software as well as integrating it with various Microsoft products, including Xbox, Skype and Kinect, should provide Microsoft's Surface something other tablets do not have.
"We are positive on the strategic possibilities, but believe that execution is key. Even though MSFT is closely following the Apple playbook, this offers it the best prospects of making any headway in the tablet space." Ernst wrote in his research note. He has a buy rating and a $35 price target on Microsoft shares.
Even though details such as pricing or availability were left out, JPMorgan analyst John DiFucci believes the device has a chance to reach commercial success, as it has several features to differentiate itself.
The Surface has a 16x9 aspect ratio, which DiFucci noted would be "pleasant for watching HD video, but will be less useful when held in Portrait orientation, which many current tablet users prefer for reading." It also has "the ability to use any two apps side by side at the same time." DiFucci rates Microsoft shares at neutral.
Shares of Microsoft are up 14.95% since the start of the year.
The Surface will have two versions, one that runs on Intel (INTC) chips, and one that runs on ARM Holdings (ARMH)-based microprocessors, and the ARM-based tablets are where Microsoft can really make inroads, says Raymond James analyst Michael Turits.
"On the one hand, the Windows RT (ARM) version gets Microsoft into the ballpark with a tablet of the right dimensions and weight to compete with the Apple iPad," wrote Turits, who has an outperform rating on Microsoft. "Compared to the iPad (WiFi) at 9.5"x7.3", 9.4 mm thick, and 652 grams, the Windows RT Surface has a 10.6" display (16x9 aspect ratio), and is 9.3 mm thick and weighs 676 grams."
The ARM version comes in 32 GB or 64 GB versions, while the Intel version of the Surface comes in 64 GB or 128 GB.
Shares of ARM have lost 15.61% year-to-date.
A major selling point of the Surface is its 10.6-inch touch screen, which is larger than the iPad, and the entire screen is touch sensitive, which could benefit Cypress Semiconductor, Sterne Agee analyst Vijay Rakesh wrote in a research note.
"If the MSFT Tablet 'surface' is going to be a template for other Win8-WinRT tablets it could be a bigger catalyst for the Touch Suppliers. The Reasons: 1) the 10.6" screen is all Touch and 2) the Cover that Doubles as a Keyboard is a Multitouch Capacitive Keyboard. CY is a qualified supplier on the Win8 platform," noted Rakesh, who has a buy rating with a $19 price target on the stock.
If consumers take to the Surface, Cypress should benefit, in large part to its supplier relationship with Windows 8, Rakesh said. Windows 8 is expected to launch in the second half of this year. Analysts polled by Thomson Reuters expect Cypress Semiconductor to generate full-year earnings of 87 cents per share on $860.54 million in revenue.
Shares of Cypress Semiconductor have lost 15.61% year-to-date.
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