Abreast of the market: Wall Street anxiously awaits Microsoft's Windows 95

System's reception may affect stocks for months to come

Dave Kansas, Staff Reporter
The Wall Street Journal

June 19, 1995

It's the second-hottest topic on Wall Street after interest rates, a driving force that could well influence the course of the stock market for months to come.

What's the big deal? Windows 95.

With so-called beta test sites littered across the country, anxiety about the late-August launch of Microsoft's new operating system is intensifying. Questions about the software are sweeping through Wall Street, and for a market that discounts future news months early, investors are already betting on the answers. Will it arrive on time? Will it work? Who will benefit? Who will lose?

The Windows 95 operating system has become the most important product introduction in decades for the stock market. With the technology sector firmly in the forefront of the six-month-old stock-market rally, the success of the program has taken on immense significance, becoming in essence the linchpin of the market's future direction.

A bad stumble by Microsoft in launching the product would spill into the technology group and then ripple through the rest of the market with dismal effect. But a successful roll-out will spur another cycle of technology upgrades. That means personal-computer purchases, demand for more powerful semiconductors, a plethora of new software and other products. If it works, the entire technology sector will get a lift and that, in turn, will take the broad market higher into record territory.

"This is big-time important, and not just for Microsoft," says Robert Doll, executive vice president at Oppenheimer and head of the Oppenheimer Growth Fund, a big holder of Microsoft stock. "If Microsoft were to announce that they were having big problems and they'd have to put off the introduction for more than two months, then we'd have a problem not just with Microsoft, but throughout the sector."

One reason for the nervous anticipation of Windows 95 is the technology sector's uninterrupted rise this year. Traditionally, the technology group has experienced a correction in the late spring or early summer. That correction has yet to occur, creating anxiety among some analysts who figure tech stocks have risen too far too fast.

But other analysts argue that expectations of a successful Windows 95 introduction late this summer has helped the group defy history and avoid the annual pullback, thereby upping the stakes for the product's introduction.

Microsoft insists that Windows 95 remains on track. But the path leading to introduction hasn't been smooth. Originally code-named Chicago, the product was first expected to arrive late last year. That was postponed and the delay extended to mid-1995, and now to late August.

According to the company, final versions of the operating systems will reach hardware makers in the next several weeks. Industry insiders say Microsoft has managed to jawbone computer makers into including Windows 95 in personal computers to be shipped for the crucial Christmas shopping season.

The importance of Windows 95 stems from the intricate interrelationship of products and companies in the personal-computer sector. Windows 95, in many ways, is the equivalent of a brand-new engine that many new cars will require. In turn, other companies make products akin to doors, tires, frames, windshield wipers, brakes and lights. Dataquest, a market research firm, projects sales of nearly 30 million copies of Windows 95 in the first four months, not to mention an increase in personal-computer purchases.

"It's believed that Windows 95 will increase the number of personal computers sold by a large number, especially in the home, because it makes games and entertainment software more accessible," says Irfan Ali, an analyst with Massachusetts Financial Services in Boston. "There's no question that Windows 95 is the key to another wave of product upgrades in the personal-computer area, and that's key for not only for Microsoft, but for the whole sector."

Indeed, more than 500 mutual funds own chunks of Microsoft, and are, in a sense, wagering on Windows 95. Among them are such big names as Fidelity Magellan, Janus Twenty and Twentieth Century Ultra, according to recent industry data.

For Microsoft, a successful Windows 95 introduction already is largely reflected in the price of its stock, money managers say. Trading at a whopping 36 times earnings, many investors are already counting on Windows 95 to provide the Redmond, Wash., software company with another leg of explosive growth. Even the unraveling of its bid to purchase Intuit, a maker of popular finance software such as Quicken, has failed to halt Microsoft's stock rise.

But analysts say other areas of the market still represent value to those looking to bet on Windows 95. Among them, big semiconductor firms such as Intel, Texas Instruments and Advanced Micro Devices. Also, makers of the computers that would use the new operating system: Compaq Computer, Dell Computer and Gateway 2000.

"As investments, Compaq and other hardware companies don't yet reflect the big surge that is likely if Windows 95 succeeds," says Roger McNamee of Integral Capital Partners in Menlo Park, Calif. "If you want to look at bang-for-your-buck, the hardware area will likely be a better sector."

Perhaps the largest fear would be any unexpected problems with the new generation operating system. And some money managers, like Oppenheimer's Mr. Doll, concede that Windows 95 could face a modest delay, which the market could swallow. Anything more serious, however, would be a setback.

"Any disappointments could hit the rest of personal-computer industry, and that could make people rethink the whole technology sector," says Neil Hokanson, president of Hokanson Financial Management in Encinitas, Calif. "Whatever happens with Windows 95, we're going to see a significant ripple effect throughout the whole market. It will affect the whole food chain."

One possible stumbling block for Windows 95 is the Justice Department's concern about Windows 95 inclusion of the Microsoft Network, the software maker's own on-line network. Competitors such as America Online complain that Microsoft's inclusion of the on-line network in the operating-system software is anticompetitive. Many analysts think time is too short for the Justice Department to prevent Microsoft from rolling out Windows 95 without the network.

Even if Microsoft shakes the department's inquiry, and does get Windows 95 out in time, that still doesn't guarantee success.

The big "question is whether people upgrade to Windows 95 immediately, or do it over time," says Frederick J. Ruvkun, a money manager at Bessemer Trust in New York. "It could happen right away, or it may take a little while. But in any case, this product is the key event for the industry, and the market."


Friday Market Activity

Stocks mustered modest early gains built mostly on trading related to the expiration of options and futures. Equities then settled into a listless session and finished narrowly ahead.

The Dow Jones Industrial Average tacked on 14.52, or 0.32%, to 4510.79, the first time the average closed above 4500.

On the New York Stock Exchange, there were 1,094 issues advancing, 1,090 declining and 809 unchanged. Big Board volume totaled 442.7 million shares, compared with 334.6 million Thursday.

The Standard & Poor's 500-stock index advanced 2.71, or 0.50%, to 539.83. The New York Stock Exchange Composite Index gained 1.20, or 0.42%, to 289.96. The Dow Jones Equity Market Index added 2.55, or 0.50%, to 507.15.

The Nasdaq Composite Index jumped 5.97, or 0.66%, to 908.65, while the American Stock Exchange Market Value Index climbed 0.68, or 0.14%, to 495.40.

For the week, the Dow Jones Industrial Average added 86.80, or 1.96%. The S&P 500 gained 11.89, or 2.25%. The Nasdaq Composite shot up 24.26, or 2.74%.

Many telecommunications and media companies posted gains on enthusiasm for the new telecommunications-deregulation legislation working its way through Congress.

Capital Cities/ABC rose 3 1/4 to 106, Clear Channel Communications added 4 5/8 to 69 and Time Warner gained 1 1/2 to 40 5/8.

Among telecommunications companies, Ameritech advanced 7/8 to 46 1/4, Bell Atlantic moved up 1 1/2 to 57 and BellSouth climbed 1 1/8 to 63 7/8.

Microsoft jumped 2 1/8 to 87 on Nasdaq after a federal appeals court held that a lower court judge shouldn't have rejected the Justice Department's antitrust settlement with the software maker over software-discounting practices.

Caremark International advanced 1 7/8 to 21 7/8. The home health-care services provider reached a settlement with criminal investigators that will end an inquiry into kickbacks. The company agreed to plead guilty and pay about $159 in million civil damages and criminal fines. In the wake of the news, Rodman & Renshaw raised its rating on the company to "buy" from "neutral."

(See related article: "Small Stock Focus: Successful Launch Would Be a Boon To Dozens of Firms" -- WSJ June 19, 1995)

Copyright Dow Jones & Company Inc