Goldman Sachs Admits They Were Wrong About Microsoft, Upgrades Stock From “Sell” To “Neutral”

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Goldman Sachs analysts yesterday released a report in which they upgraded Microsoft stock from “sell” to “neutral”. They also admitted that they were wrong about Microsoft. Read an axcerpt from their report below,

We upgrade MSFT to Neutral from Sell. Since its addition to the Sell list on 4/11/2013, MSFT is +84% vs. the S&P +29%. Despite out year estimates consistently compressing, we failed to appreciate that the stock would disconnect from downward EPS revisions, and the significant upward re-rating of the multiple driven by MSFT’s transition to the cloud (Office 365 and Azure). We were wrong. On average, out year consensus EPS estimates have declined 11% in FY15 and 13% in FY16 from one year before the beginning of the FY, yet during that time MSFT’s NTM P/E multiple has increased from 10x to 20x. …

We are increasing our out year non-GAAP EPS estimates, driven primarily by faster gross margin expansion in Office 365 and Azure. While we still believe EPS consensus for FY17 and FY18 are too high, given the ongoing successful transition to the cloud we do not see the multiple coming under pressure. As such, we believe a Neutral rating is more appropriate.

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