Analysts at Stifel Nicolaus downgraded their rating for the shares of Microsoft Corporation (NASDAQ:MSFT) from Buy to Hold, and they also removed their price target of $36 for the stock.
Stifel Nicolaus analysts Brad Reback and Arvind Rajamohan said that they are increasingly concerned about the “pricing-pressures and heightened Windows S&M expenses,” which might serve as strong headwinds to the EPS and revenue growth of Microsoft Corporation (NASDAQ:MSFT) over the next years.
The analysts said that despite the fact that the software business (MBD & S&T) and enterprise story of Microsoft Corporation (NASDAQ:MSFT) is robust and worth ~$33-$34 per share, they believed that the headwinds confronting Windows are stronger than they expected in the past few months.
Analysts feel consensus estimates for Microsoft are too high
In addition, Reback and Rajamohan think that the current consensus EPS and revenue estimates of Wall Street analysts for the software giant for 1Q14 and FY1414 are too high. According to the analysts, the consensus estimate for the September quarter of Microsoft Corporation (NASDAQ:MSFT) is mis-modeled as the software giant highlighted “low teen” growth for OPEX during its conference call last month.
The analysts noted that the consensus EPS estimate for Microsoft Corporation (NASDAQ:MSFT) for 1Q14 is $0.57, which represents a modest single-digit OPEX growth, but higher than their $0.49 EPS estimate. According to Reback and Rajamohan, they increased their 1Q and FY14 OPEX forecast. They said, “We expect the quest to regain Windows market share to regain the trump spending discipline during FY14.”
Reback and Rajamohan projected that Windows ASP will decline from its current level at ~$43 to ~$39 in FY15 as Microsoft Corporation (NASDAQ:MSFT) tries to stimulate core PC demand, increase the market share of its tablets, and due to the slowdown of corporate upgrade cycle.
According to the analysts, the stock price of Microsoft Corporation (NASDAQ:MSFT) which is still around $33 to $34 per share, is supported by the MBD, S&T businesses and the available cash of the company.
Analysts list positive indicators for Microsoft
In addition, the analysts anticipate that the management of the software giant will increase the company’s dividend payout by 5% to 10% by September. According to them, the increase will be modest because of the growing CapEx requirements of Microsoft Corporation (NASDAQ:MSFT).
Furthermore, Reback and Rajamohan opined, “We also think MSFT’s decision to more aggressively move Office to iOS/Android, any shareholder activism, and favorable changes to tax repatriation could also be a positive for the stock.”
The analysts reduced their 1Q EPS estimate for Microsoft Corporation (NASDAQ:MSFT) to $0.49 to reflect a higher OPEX. For the full fiscal 2014, they projected that the software giant will deliver $2.57 EPS on $81.99 billion revenue. Their fair valuation for the stock is $32.87 per share based on ~12x CY14E EPS of $2.77, slightly in line with its large cap peers trading at 12.3X.