Microsoft will see continued strong headwinds from currency exchange rates and weakening PC demand, but all’s not lost. Analysts generally think the company’s valuation is still attractive, although at least two firms have trimmed their price targets for Microsoft stock.
Trouble at Intel signals trouble for Microsoft
UBS analyst Brent Thill and Barclays analyst Raimo Lenschow both cited Intel’s recent preannouncement of weak earnings as a major factor in their price target cuts. The reason Intel’s weaker than expected numbers mean problems for Microsoft is because they signal that PC demand is even weaker than previously thought.
Thill trimmed his price target for Microsoft from $52 to $49 per share and reiterated his Buy rating, while Lenschow lowered his price target by $1 to $49 per share and maintained his Overweight rating on the company.
PC shipments remain weak
Thill reported that his checks in Asia back up IDC’s recent reduction in PC shipment guidance for this year and Intel’s preannouncement of weaker than expected revenue. He noted that Intel specifically mentioned a weaker than expected XP SMB refresh but didn’t say anything about negative impacts from large enterprise customers.
As a result, and because of the low comparable, he believes quarter over quarter growth rates for PC shipments in the June quarter will likely normalize. Additionally, he thinks strength in developed regions will offset weakness in other parts of Microsoft’s business.
Headwinds for Microsoft
Another major impact Microsoft is facing right now is foreign exchange rates as currencies weaken against the U.S. dollar. He believes constant currency results matter the most, however.
Also Microsoft is in the midst of a transition, which creates further headwinds, and enterprise customers are in the process of shifting their business to the cloud. Meanwhile Microsoft is shifting its investments away from mobile and toward other categories, which he thinks may take extra time to make a difference in the company’s top and bottom lines.
Overall, Thill thinks Microsoft is heading in the right direction with its changes, but he admits that the turnaround will take some time to complete. He also pointed out that management is “showing strong financial discipline around expenses,” which should boost margins and earnings. Also their recently announced share repurchase program should put a floor on Microsoft shares.
Microsoft to face headwinds in the second half
Lenschow said in a report last week that the PC unit data points plus higher macro pressures throughout Europe and some parts of Asia are setting Microsoft up for a difficult second half of the year. The movements in the euro and the yen are becoming more meaningful and will weigh more heavily on Microsoft’s results than what management expected when they issued their guidance.
He thinks Microsoft’s commercial cloud business will keep being the bright spot in its business, potentially brining triple-digit revenue growth. He expects this trend to continue over the next several quarters.
As of this writing, shares of Microsoft were up 0.13% to $41.62 per share.
