Make Way for Microsoft

Microsoft(MSFT Quote) has a tough act to follow: itself.

After running up 39% since mid-June, the software giant will have to convince investors that there's room for the stock to grow.

It may be a tough sell -- in the short run, at least. With second-quarter earnings hitting the wire after Thursday's close, the consensus of the sell-side analysts who follow the stock is a target price of $32.35, not much above Wednesday's closing price of $31.09.

But give it a few quarters, say managers who hold the stock, and the picture could change. "Microsoft underperformed the market for so long, now that it's moving, it's like an oil tanker -- hard to stop," says Alan Lowenstein, a portfolio manager with American Fund Advisers.

For the first time in years, the company is getting the kind of feel-good buzz usually reserved for Apple(AAPL Quote). Lowenstein and other Microsoft bulls cite two recent developments to bolster their case:

• The so-far successful launch of Vista, the first new version of Windows in about five years, is a big one. Major business customers got their hands on the long-delayed product in November, and sales were reportedly stronger than expected. Consumers will get the software next week, and it will come pre-installed on the vast majority of new PCs sold in the world.
• With Sony(SNE Quote) lagging badly in the video game-console race, cumulative sales of Xbox 360 hit 10.4 million units in December, comfortably above Wall Street's and Microsoft's expectations.

Also important was the stronger-than-expected showing during the holiday season of the high-priced version of the Windows XP operating system, called the Media Center Edition. UBS analyst Heather Bellini says the extra sales could result in an additional $165 million of revenue and a penny a share in incremental earnings. (Her company has an investment banking relationship with Microsoft.)