* Wall Street sees fiscal Q3 EPS $0.56 vs year ago $0.45
* Sales expected to increase 12 pct to $16.2 billion
* Windows, Office franchises driving profit
* Long-term investor fears linger
* Shares down 15 pct in 12 months
By Bill Rigby
SEATTLE, April 28 (Reuters) - Microsoft Corp is expected to report an 18 percent jump in quarterly profit on Thursday, as its reliable Windows and Office franchises keep growing.
But that may not be enough to rouse its shares from a decade-long slumber or ease fears that its dominance of personal computing is waning.
The world's largest software company has sold a record-breaking 350 million licenses for its Windows 7 operating system since launching it 18 months ago, and its latest Office suite of applications is a hit with businesses.
But even if Microsoft follows most other tech companies and beats Wall Street's expectations -- as it has done for the last six quarters -- there is no evidence that it will turbocharge the stock, which trades around the same level it did 10 years ago.
Investors fear that new gadgets, led by Apple Inc's iPad, are the thin end of the wedge that will one day separate Microsoft from its core customers.
The new tablets "are making a sea of Microsoft customers comfortable using an operating system different than Microsoft's," Michael Yoshikami, chief executive of fund manager YCMNET Advisors, said earlier this week.
"You're going to see a migration away from the monopolistic dominance that Microsoft had, and that's worrisome for them."
Apple's iPad, along with a handful of tablets running Google Inc's Android system, are starting to eat at the edges of Microsoft's domination of personal computers.
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. [ID:nN13301394]
VALUATION SAGS
Long term, some see the new devices as unleashing a genie that Microsoft may never be able to put back in the bottle.
That fear has chilled Microsoft's stock, pushing it down 15 percent in the last year, compared with a 16 percent gain in the tech-heavy Nasdaq.
Despite quarter after quarter of strong results for Microsoft -- the company racked up record sales and profit in the last three months of last year -- investors are unwilling to grant it the valuation they used to.
The stock is now trading at 9.6 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.
Although some options traders are betting on an upward swing in Microsoft's shares after the results, past experience has shown that even blowout results tend to be priced in before earnings. [ID:nN27133813]
This quarter, 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 is 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 a 95 percent jump in second-quarter net profit to $5.99 billion last week. [ID:nL3E7FK17N]
Microsoft is expected to report an 18 percent increase to 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 Wednesday, Apple led the pack with a market value of $324 billion. Microsoft was a distant second at $220 billion, with IBM close behind at $204 billion. (Editing by Gary Hill and Muralikumar Anantharaman)