Goldman removed the stock from the firm’s “America’s Conviction List,” but keeps its Buy rating. In a note on the removal from the list, Friar says that she continued to view the stock as a core holding, with “substantial product cycle launches” in Vista, Office 2007, Exchange Server 2007, Xbox 360 and Longhorn Server. But she adds that “ahead of the second-quarter earnings report investor nervousness remains high, particularly given uncertainty regarding spending plans in FY 2008 and recent negative management comments on Vista.”
She notes that the stock is up 25% since it was added to the Conviction list in June 2006.
While she maintains the Buy rating, Friar’s comments sound a more cautious stance than we have heard from Goldman on Microsoft in quite some time. Recent product launches, she says, “potentially mark the end of an era,” with “changing technology and business models in areas such as software-as-a-service, virtualization and open source” combining to “diminish Microsoft’s stranglehold on the desktop, which in turn significantly depletes the company’s cash cow. Vista may be the last big operating system developed by the company.”
In a second, longer report on the company which effectively re-launches coverage on the stock, Friar asserts that Microsoft needs to find new sources of growth, which is clearly what the company is trying to do with both gaming and online services. She notes that “significant investments are required” in the company’s online operations, and says that “contrary to Microsoft’s past pattern, we could see sizable acquisitions to bolster the company’s online presence.”
One final point: Friar notes that growth managers on average are significantly underweight the stock, which is 3.5% of the Russell 1000 growth index and 1.9% of the S&P 500. She says that could lead to a “snowball effect” if the stock moves up, “since growth managers cannot afford to miss Microsoft” should it show significant appreciation.
Meanwhile, Bank of America’s Kirk Materne yesterday asserted that Microsoft’s March quarter results could show upside to consensus estimates at both the top and bottom lines, driven by solid uptake of premium versions of Vista, strong momentum from Office 2007 and improved profitability in the entertainment and devices division.
Materne says the FY 2008 outlook will be “key.” He sees the company guiding in line with the consensus at $56.25 billion and $1.69 a share. For the March fiscal third quarter, he sees $13.82 billion in revenue and EPS of 45 cents.
Microsoft yesterday was down 17 cents at $28.40.
MSFT 1-yr chart