Microsoft last month launched the newest version of its operating system, which incorporates more tablet-like features such as touch capabilities. The company is making a big bet with the new OS, counting on the software to help fend off competition from the iPad and other mobile devices. But there have been worries that Windows 8 demand is sluggish, with consumers instead opting for tablets.
Sherlund noted that PC vendors have been slow to introduce new devices such as tablets and ultrabooks with touch screens. And Windows 8 has a learning curve and has faced "abundant bad press."
In addition, Nomura recently cut its forecast for PC unit sales in the current quarter, saying that sales should slide 7 percent instead of being flat.
"In looking at Microsoft, we have assumed essentially no growth going forward in traditional PCs (or actually down about 6 [percent] if we exclude new ultrabooks) and the more relevant market growth of about [3 percent to 5 percent] if we include Windows-based tablet devices. We assume that many consumers will prefer an iPad to a Windows device, but that Office is still an anchor for enterprise and prosumers that may chose to upgrade notebooks to either ultrabook touch or tablet/hybrid devices for longer battery life, thin, light-weight and touch that addresses the desire for new form factors and new tablet based usage and apps. 2013 could be a good upgrade year for old notebooks," Sherlund said.
As a result, Sherlund cut his estimates for Microsoft's earnings next year by about 4 percent, saying per-share earnings will only grow about 8.5 percent in calendar 2013. However, he does believe Microsoft's stock already reflects much of the bad news.
"We think investors that can have a thick skin through the awkward quarter or two of the Windows 8 transition will likely see better traction ahead," Sherlund noted.
While analysts have expressed concerns about Windows, Microsoft yesterday touted the reception to the software. Tami Reller, chief marketing and financial officer for Windows, said the company has sold 40 million Windows 8 licenses in the month since the October 26 launch. By comparison, Microsoft sold 60 million Windows 7 licenses in the first two months that software was available.