Microsoft Corporation stock is up 6.7 percent on Wednesday morning after the company delivered a big Q2 earnings beat. While investors are buying into Microsoft’s turnaround story, Citi analyst Walter Pritchard is not convinced the company’s problems are behind it just yet.
“[The] trend of beats and lowers continues and with less upside to street in this quarter, we still see numbers drifting lower as [the] street combo of high revenue/high margins looks unlikely,” Prichard explained.
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Microsoft delivered strong Q2 revenue in its Productivity and Business Process (PBP) and Intelligent Cloud segments. However, Pritchard pointed out that commercial bookings were weak and management predicts 1 percent gross margin pressure ahead in 2017. In addition, operating income and PBP continue to trend lower year-over-year.
Earnings were boosted by lower-than-expected tax rates. Pritchard also noted that the company plans to monetize about $5 billion in equity investments, which will end up being another low-quality earnings boost in coming quarters.
Following the post-earnings jump in Microsoft’s stock, Pritchard believes Microsoft is even less appealing from an investment perspective. Microsoft now trades at a sizable premium to tech peers Oracle Corporation and SAP SE (ADR) .
Citi maintains a Sell rating on Microsoft’s stock, but raised its price target from $37 to $40. The firm names SAP as its top pick in the mega-cap space.
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Disclosure: The author holds no position in the stocks mentioned.
| Date | Firm | Action | From | To |
|---|---|---|---|---|
| Jul 2016 | Wunderlich | Maintains | Hold | |
| Jul 2016 | Citigroup | Maintains | Sell | |
| Jul 2016 | William Blair | Initiates Coverage on | Market Perform |
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