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Microsoft's Q3 Was Tough But Core Story Remains Intact, Morgan Stanley Says

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Microsoft Corporation MSFT reported Q3 results in-line with and Q4 guidance short of expectations. Morgan Stanley’s Keith Weiss maintained an Overweight rating for the company, while reducing the price target from $66 to $64. The analyst mentioned that Microsoft’s core story remains intact and the company is likely to offer mid-teens returns in the longer-term.

Microsoft’s recent performance has come under pressure due to an uneven macro environment, declining PCs and a higher tax rate. Analyst Keith Weiss pointed out, however, that the company’s core story was unaffected by this, with Office 365 and Azure boosting growth in the commercial annuity base, “which should sustain a durable mid-teens return profile at MSFT longer-term.”

Investors Likely Disappointed

Microsoft had been delivering solid beats till now. The company’s recent in-line Q3 results and significantly short Q4 guidance are likely to have left investors disappointed, Weiss said. The Intelligent Cloud [IC] and Productivity Business Process [PBP] segments were negatively impacted by an uneven macro and weak PCs. This is likely to continue in 4Q.

Commercial Recurring Revenue Base

The data points for Microsoft’s ability to sustainably grow its commercial recurring revenue base remain positive, the analyst commented. Commercial bookings grew 9 percent, in constant currency terms, with commercial Office 365 up 63 percent, Azure revenues climbing 120 percent and double-digit growth at the annuity portion of Server & Tools.

“The solid growth in these businesses push the annuity mix to 86% of total commercial revenues, up 400 bps YoY,” the Morgan Stanley report noted.

The EPS estimate for FY17 has been reduced from $3.10 to $2.95 due to higher capex spending, lower revenue base from FY16 and higher tax rate.

Apr 2016Goldman SachsMaintainsNeutral
Apr 2016Morgan StanleyMaintainsOverweight
Apr 2016Cowen & CompanyMaintainsMarket Perform

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