Analysts at Jefferies initiated coverage on the shares of Microsoft Corporation (NASDAQ:MSFT) with an Underperform rating and a price target of $40 per share today.

The stock price of the software giant declined 1.76% to $47.83 per share at the time of this writing around 1:03 in the afternoon in New York.

Microsoft Corporation Initiated with Underperform: Jefferies

In a note to investors Jefferies equity research analyst John DiFucci and his team explained that their stock rating for Microsoft Corporation (NASDAQ:MSFT) was based on their” fundamental view of an exceptionally successful, dominant company facing unprecedented challenges and a stock price that posted sharp gains purely on expectations in operational performance as a result of shareholder activism and new management.”

Microsoft issues related to challenging fundamentals

The analysts believed that Microsoft Corporation (NASDAQ:MSFT) will remain very much like its old self for some time under its new management. According to them, the issues confronting the company are “more related to challenging fundamentals.”

DiFucci and his team noted that the stock price of Microsoft Corporation (NASDAQ:MSFT) rose 30% over the past year, two times the performance of the S&P 500.

The analysts pointed out that the fundamentals of the software giant were little changed despite its focus on “mobile first, cloud first.” “The more things change, the more they stay the same,” according to them.

Microsoft’s profit still driven by PCs

According to the analysts, Microsoft Corporation (NASDAQ:MSFT) still generate a majority of its profit from PCs. DiFucci and his team estimated that the PC sector will still drive 41% of FY17 revenue and 74% of operating profit (pro-forma for the Nokia acquisition).

DiFucci and his team were uncertain whether Microsoft Corporation (NASDAQ:MSFT) will fully benefit from the increasing demand for PC. Gartner estimated a 3% increase in PC unit growth. The analysts emphasized that the number of low-cost tablets and Chromebooks are increasing. The devices are expected to pressure units and ASPs, which will have an impact on Windows ASPs.

The analysts emphasized that the cost-cutting initiative of the management of Microsoft Corporation (NASDAQ:MSFT) was above expectations and alleviated some of the concerns regarding sustainability of margins. However, they believed that the position of the company in the mobile sector remained challenged.

DiFucci and his team commented that Microsoft CEO Satya Nadella’s strategy in refocusing the company towards products, profitability and capital allocation was positive. However, they noted that Nadella “is a long-time Microsoft veteran and has already committed to staying the course with the Xbox.”