Earlier this month, we reported that the Goldman Sachs team, led by analyst Heather Bellini has downgraded Microsoft stock as ‘Sell Now’. They said that Microsoft’s stock will drop to $38 (currently trading around $40) within the next 12 months. They saw risk to both revenue and EPS for rest of the year and also FY16 and FY17 due to poor performance from D&C licensing and Commercial Licensing divisions.
Today, Citi group led by analyst Walter Pritchard is also doing the same. They expect stocks will fall to $36 after Microsoft reports earnings later this month.
We rate shares of Microsoft a Sell. We believe shares are being buoyed by excitement around new CEO Nadella and cloud services.
Citigroup is concerned about Windows challenges and associated consumer monetization, cloud transition / margins while maintaining developer relevance).
Pritchard is particularly concerned about:
- Continued decline of the PC market that is not offset by Microsoft’s small share of the smartphone market.
- Cannibalization of the company’s high-margin cash cow businesses, including Windows and Office, replaced by lower-margin cloud-based businesses.
- More debt on the books to offset the decrease in cash flow and still meet the promises for stock buy-backs.
- and, like all the bears these days, he also warns there could be a bigger hit from the foreign exchange rate, which is plaguing all US multinationals.
In mid-term, I think analysts fear of fall in earnings is acceptable. But in long term, I believe Microsoft has great growth potential. What do you think?