Microsoft Corporation (NASDAQ:MSFT) revenue numbers were not so impressive at $19.9 billion, which were below the Citi Research’s expectation of $20.6 billion and The Street’s expectation of $20.7 billion. Primary reason for the downfall of the revenue was Windows segment, “with Surface, not OEM appearing to be the culprit,” says a report from Citi.

Microsoft

Numbers below estimates

Revenue reaped from Server and Tools, and MBD revenue was less than the Citi expectations. Earnings per share came in at $0.56, which was less than the Street expectations of $0.78. Corporate PC was in better position than consumer PC. Unearned revenue came in at $22.4 more than Citi Research’s expectation of $22.1 billion and Street’s expectation of 21.5 billion, reflecting strong performance of annuity business.

For the fourth quarter, CAPEX surged to $1.8 billion, twice the number in the third quarter. For full fiscal 2013, CAPEX was $4.3 billion, more than guidance of $3.4 billion.  Windows contribution margin came down to 42 percent. Microsoft Corporation (NASDAQ:MSFT) did not give any guidance on revenue and Gross margin for Fiscal 2014.

Valuation of Citi

Analysts at Citi have set the target price of $35 on the shares of Microsoft Corporation (NASDAQ:MSFT) based on 10 year discounted cash flow with a terminal value based on a 7x multiple. According to Citi, revenue is expected to grow 6 percent in years 1-2, CAGR of 5 percent and long term growth is expected to be 3 percent. In the next 10 years, there will be margin erosion of around 10 points. Citi has taken risk free rate of 1.81 percent, 6.54 percent equity risk premium and beta of 0.93.

Potential risks for Microsoft

Citi Research has mentioned some potential risk in its research report; however, it did mention that Microsoft’s stock is less volatile compared to other competitors. Major portion of revenue is derived from large enterprises, which imply that the company will face major downside risk on cutting down the spending in IT. Google Inc (NASDAQ:GOOG) is challenging two core products of Microsoft: Windows PC operating system and its office productivity suite.

In order to grow in future, Microsoft Corporation (NASDAQ:MSFT) should work on securing its market leadership. According to the report, software giant is investing a large chunk of funds in online advertising with its Bing series of service and in mobile ads with its Windows Mobile Operating system. Shares of Microsoft can decline considerably if any of the potential risks is materialized. It may fail to achieve the projected numbers and targeted price failing to address any of the risks.