Microsoft Down Despite Analyst Enthusiasm

Microsoft (MSFT) shares, which had been up 5% earlier in the session, have fallen back to the flat line despite a stronger-than-expected December quarter report, increased fiscal 2008 guidance and a host of gushing commentary from the Street. That seems like an ominous portent for the market.

I actually thought that the Microsoft earnings would provide some added fuel to the rally over the last two days. But the market instead has fallen back into worry mode, and Microsoft’s gains have evaporated.

The Street commentary on MSFT this morning was almost uniformly bullish. The one thing that does sit in the background is the idea that, if the economy slumps badly enough, PC demand will be hurt, and so will Microsoft. But it doesn’t seem to have stopped the company from offering upbeat guidance on both earnings and PC sales. Here are some excerpts from the post-game commentary:

• Jason Maynard, Credit Suisse: Reiterates Outperform rating and $42 target. “As a whole we think the diversification and scale of Microsoft’s business model make this one of the best technology names to own,” he writes. “We continue to think that the stock is an attractive risk-adjusted growth investment relative to some of the enterprise software vendors that could be more exposed to lower 2008 IT budgets.”
• Brent Thill, Citigroup: Maintians Buy rating and $41 target. “While the potential for slower PC unit growth in 2008 could negatively impact MSFT, its geographically diverse revenue base, strong enterprise product cycle, consumer exposure, the relatively low price point for many of its products and efforts to combat piracy should help insulate the company,” he writes. “MSFT is a compelling value trading at 17x forward earnings vs. its 5-year trough of 16x.”
• Mark Murphy, Broadpoint Capital: Maintains Buy rating and $39 target. “MSFT shares continue to offer relative outperformance based upon a very rich product cycle, legalization efforts and favorable windows premium mix,” he writes.
• John DiFucci, Bear Stearns: Maintains Peer Perform rating. “While MSFT’s execution has certainly been impressive over the last couple quarters, we believe that even MSFT will unlikely be able to manage a potential negative shift in macro demand fundamentals over the next quarter or two.”
• David Hilal, Friedman Billings Ramsey: Maintains Outperform rating and $40 target. “Despite a touch economic environment, management raised its guidance for the balance of the year,” he notes. “Our thesis remains intact: we believe MSFT is still in the early days of a massive product cycle across all of its business units, and this should drive sustainable double-digit revenue growth and improve operating and net margins.”
• Sarah Friar, Goldman Sachs: Repeats Buy rating and $42 target. “We view the stock as defensive in a tough macro environment,” she writes. “Microsoft’s ongoing product cycle momentum, broad international exposure with derivative currency benefit, as well as SMB strength, are all reasons we like the stock.”

MSFT was down 31 cents at $32.94; the stock had traded as high as $35 earlier in the session.

Comments

[Tom B:]

MSFT is a value play, and not a good one at that. Why should I buy MSFT when I can buy more DD or GE?

2008 Jan 28 07:12 AM

[john mullinax:]

Good roundup of analyst comments. Thanks. As one of the top R&D spenders in the world, Microsoft has a huge amount of innovation coming down the pipe. One of the biggest challenges for Microsoft is enterprises' ability to productively absorb this innovation. Some will do it well, some will do it poorly, and a few won't do it at all. Those businesses that manage to put to put Microsoft's innovation to good use have an opportunity to differentiate themselves from those who don't... but many will struggle to keep up with the blistering pace at which Microsoft is bringing new capabilities to market.

Microsoft also has a hidden strength -- as the product portfolio broadens Microsoft is developing different kinds of relationships with the enterprises in the marketplace. Increasingly, Microsoft is not just a technology vendor, but a broad partner across in how enterprises serve their own customers and suppliers. If they can leverage the new relationships to drive greater technology adoption, then the future should be very bright for Microsoft. BTW, I blog at blogs.msdn.com/johnmul... .

2008 Jan 28 03:32 PM