Microsoft might be about to report its earnings grew more than 20 percent on climbing revenue but the results will fail to rouse the software company's shares from a decade-long slumber or douse fears its dominance of personal computing is waning.

The second-largest U.S. technology company is expected to post on Thursday yet another solid gain in earnings and sales for its fiscal third quarter, as its stalwart Windows and Office franchises rumble on.

Although the venerable software suites remain clear market leaders, investors fear people are getting used to new ways of computing -- using Apple Inc and Google Inc tablets and smartphones -- and that will erode Microsoft's dominance in a work and consumer space that relies on personal computers and installed software.

What people are going to be focused on is what's happening with their core PC business, said Michael Yoshikami, Chief Executive of fund manager YCMNET Advisors. Is that slowing down? That's really going to dictate what Microsoft's future earnings power is going to look like.

In the long term, their core cash flow business is going to be impacted, particularly if we start to see an ASP (application service provider) model where companies are essentially renting software.

That is precisely what companies like Google and Salesforce.com Inc offer with their online programs. Microsoft is countering with online versions of its own, but it has not yet done enough to persuade investors it will carry its dominance of the desktop into the age of cloud computing.

In the past six quarters, the world's largest software company has beaten Wall Street estimates -- hitting a few records along the way -- only to see its stock fall in subsequent days. Its shares are now down 17 percent from a year ago, compared with a 14 percent gain in the tech-heavy Nasdaq index, and stuck at the same level as in 2001.

PC sales -- the most reliable indicator of Microsoft's financial success -- fell 1 percent in the first three months of the year, according to one research firm, as the iPad and tablets ate away at the fringes of the market.

Long term, some see the new devices as unleashing a genie that Microsoft may never be able to put back in the bottle.

The new tablets are making a sea of Microsoft customers comfortable using an operating system different than Microsoft's, said Yoshikami. You're going to see a migration away from the monopolistic dominance that Microsoft had, and that's worrisome for them.

NO RESPECT

That fear has chilled Microsoft's stock. Despite quarter after quarter of strong results -- racking up record sales and profit in the last three months of last year -- investors are unwilling to grant Microsoft the valuation they used to.

The stock is now trading at 9.4 times expected earnings for the next 12 months. That is half the stock's 10-year average and below the 13 times average for major tech companies.

Even Microsoft's 2.5 percent dividend yield, which lags only Intel Corp's among big tech, is not enough to persuade investors to change their outlook.

But that presents an opportunity to some who feel the share price does not reflect Microsoft's true worth.

We view it as undervalued, said Kevin Walkush, business analyst at Jensen Investment Management, talking about the stock. The climate really is negative toward Microsoft, and negativity overshadows a lot of the good things.

While he acknowledges Microsoft has been slow to adapt to the explosion of smartphones and tablets in the consumer market, he thinks the reality of Apple and Google's threat to Microsoft's core business has been overblown.

The software giant last year began selling Windows Phone 7 for smartphones, and is now working with leading handset maker Nokia. It has also laid plans to develop a tablet-friendly operating system. But success in either market seems years, rather than months, away.

Microsoft is an enterprise software company, that is key to understanding them, said Walkush. They still have their core franchise of operating systems and Office is really strong. The enterprise market is not going away. There is not a mass migration to Google Docs.

Likewise, he thinks Apple has not shown much promise in the lucrative business sector.

Apple's doing great on the consumer side, but I don't see them storming the gates on the enterprise side, he said.

THE NUMBERS

Microsoft is expected to post sales growth of 12 percent to $16.2 billion in its fiscal third quarter, and earnings of 56 cents per share, up smartly from 45 cents a year ago, according to Thomson Reuters I/B/E/S.

That's a respectable gain in a slow-moving economy, but it may not be enough to keep its grip on the technology crown.

Apple, which overtook Microsoft in terms of market value and quarterly sales last year, posted second-quarter net profit of $5.99 billion last week [ID:nL3E7FK17N]. Microsoft is expected to report only $4.7 billion.

Two years ago, Microsoft's quarterly profit was almost double Apple's. The last time Apple produced more profit in a year than Microsoft was 1990.

To add insult to injury, Microsoft's languishing stock means it may be overtaken in market value soon by IBM, the lumbering old foe that Microsoft vanquished in the 1990s.

At the close of business on Monday, Apple led the pack with a market value of $324 billion. Microsoft was a distant second at $214 billion, with IBM close behind at $205 billion.

(Reporting by Bill Rigby; Editing by Edwin Chan and Tim Dobbyn)

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