Microsoft's MSN Platform Drive

"I don't think we ever go back to the world of a dumb terminal ... that's the mainframe world, even if we go back there on the Internet," says Chris Bonavico, a portfolio manager with Delaware Investments, which owns Microsoft.

"You'll always need intelligence on the client," he adds, referring to the desktop computer.

Still a Laggard

Still, Bonavico acknowledges that MSN's execution has disappointed: Despite the flurry of recent developments, MSN still ranks behind Yahoo! and Google.

In a survey at the beginning of the year of 62,000 U.S. households, Forrester found that only 21% use MSN at least once a week -- far behind the 48% who use Google and 40% who use Yahoo! at least once a week.

"They still have a long way to go not only in terms of product development but just [catching up to] the momentum Yahoo! and Google have," Forrester's Li says.

Not surprisingly, MSN's financials also reflect this. MSN sales are running at about half those of Yahoo! and Google, and its operating margin is also lower.

On the flip side, though, Yahoo!'s and Google's numbers could suggest opportunity for growth in MSN if the division can execute.

But for now the unit is typically overlooked because it's such a small part of Microsoft -- 2.8% of operating income and 5.7% of revenue in fiscal 2005, which ended in June.

Based on a sum-of-the-parts analysis of Microsoft, Bernstein analyst Charlie Di Bona found that MSN contributes $1.90 a share to a stock with a total value of $39.82.

That's in stark contrast to the $300-plus stock price of Google and the more-down-to-earth, $30-plus Yahoo! price tag.

"Certainly relative to the way the market is valuing the other Internet properties, they're not attributing any value to MSN at all, or very little," says Di Bona, who rates Microsoft outperform and whose firm doesn't do investment banking. "It's clearly not valued like Google."

But for now, Di Bona concludes, "It's a tossup whether [the market] is overvaluing Google or undervaluing MSN."