Microsoft Corp shares fell 3.5 percent on Friday as its better-than-expected profit was overshadowed by worries it is failing to cope with threats from hot areas like tablet computing.

A key concern in Thursday's quarterly earnings was that sales of Windows software fell short of expectations, heightening fears that sales of smartphones and tablets are growing at a faster pace than PC sales and will eat away at Microsoft's key market.

The Windows operating system runs on 90 percent of the world's PCs.

Wells Fargo Securities said in a research note on Friday that tablet demand is likely to weigh on consumer Windows sales, as we expect the iPad version 2 and new Android devices in the coming months.

J.P. Morgan said concerns regarding tablets will hang over Microsoft like a dark cloud, and wondered if the slew of new Android tablets expected to flood the market in the June quarter will make recently reduced PC unit shipments too optimistic.

FBR was skeptical about a strong enterprise PC refresh cycle and expected tablets to impact Microsoft's core desktop franchise.

BofA Merrill differed, saying that while the threat from Apple and concerns on Microsoft's long-term growth are valid, the company's enterprise business can drive growth through upgrade and refresh cycles.

Despite the recent bounce in (Microsoft) stock, the market discounts almost zero terminal growth, which is unwarranted, it added.

Microsoft executives remained upbeat and dismissed concerns about tablets.

Jean-Philippe Courtois, president of Microsoft International, told Reuters that devices are going to go and come and that the company was making progress in developing products in the tablet arena.

Microsoft shares have fallen 3 percent in the past year and are trading at a 40 percent discount to their 10-year forward price-to-earnings multiple, according to Thomson Reuters StarMine data.

The shares were down $1.01 to $27.86 in late-morning Nasdaq trade.

(Reporting by Liana B. Baker in New York and Jennifer Robin Raj in Bangalore; Editing by Unnikrishnan Nair and John Wallace)

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