Microsoft’s Stock Drop After Vista Release Was Very Predictable

Investors may have heard at one point or another that by the time news hits the papers, it’s too late to make money in the stock based on those events. Too often someone reads about a positive development for a certain company and rushes out to buy the stock, only to get stuck with a losing investment. This happens time and time again because Wall Street is a discounting mechanism. If something is going to happen in the future, but we know exactly what it is and when it will occur, stock prices have already taken the news into account before it actually happens.

Microsoft (MSFT) stock is the perfect example of this. Some investors may have bought MSFT shares recently because their new operating system, Windows Vista, hit store shelves on January 30th. With a new revenue stream finally in the market, investors might postulate that Microsoft sales will accelerate dramatically, and with that will come appreciation in the stock price.

However, Microsoft stock actually peaked less than a week before the Vista release, and subsequently dropped about 10 percent in less than a month. In fact, this is not the first time Microsoft has dropped shortly after a major product release. Since I knew from past experience that Microsoft shares tended to sell off shortly after new product offerings hit stores, I decided to look back and see just how similar the stock’s patterns have been around the time of each of their last four Windows upgrades (Windows 95, 98, XP, and Vista). While I figured the data would be fairly similar, it was really striking.

As you can see from the chart below, Microsoft stock always peaks very close to the official Windows release date. In fact, for 3 of the last 4 upgrades MSFT peaked within 1 week of release. Amazingly, the shares have dropped by around 10 percent within 1 month of peaking in each of the company’s Windows upgrades.

These results are really fascinating, not only for the trend that they confirm, but the specific magnitude especially. So, remember this the next time Microsoft releases a major new product.

Full Disclosure: No position in MSFT at time of writing