Sterne Agee analysts Robert Breza and Jean-Baptiste Jouve initiate a Neutral rating for Microsoft Corporation (NASDAQ:MSFT) as the company is in a significant transition period regarding its management team and products.

Microsoft

Microsoft Corporation (NASDAQ:MSFT) is in a significant transition period regarding its management team and products, accentuated by underlying technology shifts including the PC/ Tablet/Mobile ecosystem and the cloud. The uncertainties of the transition keep us on the sidelines at this point after recent stock outperformance.

Transitioning or transforming

Microsoft Corporation (NASDAQ:MSFT) competes against a wide array of world class players, including Apple in consumer devices, Google in search, consumer devices, and Operating Systems, and many enterprise software companies such as Oracle Corporation (NYSE:ORCL), SAP AG (ADR) (NYSE:SAP), and salesforce.com, inc. (NYSE:CRM) to name a few. The tectonic shift of the technology landscape including PC-tophones & tablets, as well as from on premise to cloud applications has allowed many of these competitors to gain share against Microsoft’s customer base and put pressure on its dominant, most profitable Windows Operating System business, which accounts for approximately 30% of profits.

Microsoft’s management change

It is well known that CEO Steve Ballmer is stepping down. The stock rallied upon the announcement convincing investors that it would result in a fresh perspective to address the tectonic shifts occurring within Microsoft Corporation (NASDAQ:MSFT) and its markets. Transformational leadership will be needed to address the rapidly changing technology landscape; however, in our opinion, it is unlikely that a new CEO will be able to unlock significant shareholder value in the short term without creating a significant disruption resulting in a downward revision to consensus estimates. We believe the Nokia assets acquisition will likely result in distraction rather than a shareholder creation vehicle. Possible upside could be a more aggressive capital reallocation to shareholders; however, it is likely a more a medium-term event.

End of Windows XP – What’s the future?

Microsoft Corporation (NASDAQ:MSFT) is ending support for its XP operating system as of April 8, 2014. The ending support deadline for XP has helped Microsoft create a pull-through effect for Office upgrades, as well as additional purchases/upgrades for SharePoint, Exchange, and Lync over the last 12-18 months. With 90%+ of the worldwide enterprise PCs having upgraded to Windows 7, it is likely to result in lower growth rates for the enterprise segment as the company enters FY15.

Microsoft shares are up almost 40% during CY13

Microsoft Corporation (NASDAQ:MSFT) has an extremely healthy balance sheet with $60 billion in cash and a strong install base, which may be eroding in certain segments but which is likely to keep cash coming in the door albeit at a slower rate. Long-term, investors have long believed the best days are behind Microsoft. The question remains whether can the company can keep harvesting the large enterprise install base to sustain relevance.