Microsoft: Bridging the Product Gap

Microsoft(MSFT) will have a hard time grabbing as many headlines in 2005 as it did in 2004, especially in the wake of its blockbuster $32 billion special dividend announced this past summer.

Indeed, the software titan already has cautioned investors that tougher comparisons loom this year, in part because the dividend payout reduced investment income but also because no major new releases of Microsoft's flagship Office and Windows franchises are slated for 2005.

Instead, Redmond, Wash.-based Microsoft has suggested that investors stay tuned until 2006, when the next versions of both products are launched.

That pitch is sitting just fine with some Microsoft shareholders, who have enjoyed a 10% return on their stock in 2004, compared with a modest 2% for the Goldman Sachs Technology Index.

"A lot of stuff going into calendar 2006 keeps the story very interesting," said Rich Parower, portfolio manager of the (SHGTX)Seligman Global Technology Fund.

But that's not to say there aren't a few milestones to watch for in 2005 that could boost Microsoft shares, analysts and investors say. Among them:

A beta version of the new Windows operating system, dubbed Longhorn, in the first half of the year.

The next generation of its Xbox video-game console by Christmas.

The new version of Microsoft's SQL database, delayed from 2004, and its developer tools, both expected by late summer.

The first milestone, the Longhorn beta, won't actually generate any new revenue -- that will come when the final version is launched in 2006 -- but it will offer a good idea of the final version and how much its new features will ultimately drive sales. Such detail could be enough to move the stock one way or another, investors said.

"It's important that they get it out on time ... which will be encouraging to investors," said Tony Ursillo, an analyst with Loomis Sayles & Co., which holds Microsoft shares.