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Analysts At Citi Say Microsoft Is 'Not Out Of The Woods'

Analysts At Citi Say Microsoft Is 'Not Out Of The Woods' - Microsoft Corporation NASDAQ:MSFT, Oracle Corporation NASDAQ:ORCL

Microsoft Corporation MSFT 6.48% 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.

Related Link: Differences In Opinion: Big Names Weigh In On Whether The Market Is Overvalued

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 mega-cap tech peers Oracle Corporation ORCL 0.74% and SAP SE (ADR) SAP 5.01%.

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.

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