Microsoft Corporation Approaches 52-Week High On Earnings

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Microsoft shares surged following last night’s strong earnings report as analysts praised the company’s progress in its transition to the cloud. At least two firms bumped up their price targets, although the earnings results weren’t enough to trigger upgrades. Microsoft stock rose more than 6% to as high as $56.80 but stopped just short of its 52-week high of $56.85 per share (as of this writing).

Goldman Sachs raises price target for Microsoft

In a report dated July 20, Goldman Sachs analyst Heather Bellini said she raised her price target for Microsoft from $55 to $57 per share but maintained her Neutral rating. The company reported $22.6 billion in sales, beating the consensus of $22.2 billion, and adjusted earnings of 69 cents per share, which smashed the consensus of 58 cents.

Bellini pointed out that Microsoft beat consensus sales for each of its three segments, with the Productivity & Business Process segment offering the biggest outperformance. However, adjusted operating margins missed consensus by 30 basis points, coming in at 27.5% as operating expenditures were higher than management’s guided range for the second time in 11 quarters.

Microsoft’s revenue and adjusted earnings were lower than consensus at the midpoint, the Goldman analyst added, which was the ninth time in the last 12 quarters. Management expects between $21.2 billion and $21.9 billion in sales and adjusted earnings of 64 cents to 69 cents per share for the current quarter. Wall Street is looking for $22.2 billion and 69 cents per share.

Microsoft’s earnings may start moving higher in F2017

MKM Partners analyst Kevin Buttigieg noted that Microsoft “merely” reiterated its full-year guidance, calling for a decline of 100 basis points in gross margins, which is in line with consensus, and operating expenditures of $31.1 billion to $31.4 billion. Both numbers are in line with consensus. He still rates the company at Neutral with a $52 per share price target. He believes the company needs to improve its earnings leverage before its shares will rise.

Evercore ISI analyst Kirk Materne has a Buy rating and $65 price target on Microsoft.  He noted that the company’s Intelligent Cloud business bounced back following a choppy third quarter to end fiscal 2016 strong. He also said that the company’s fiscal 2017 gross margin forecast was “better than feared” at “only” a decline of 100 basis points. He liked management’s expectations for an improvement in Commercial Cloud gross margins in fiscal 2017 because he believes this signals that earnings per share will begin moving higher over the next two years.

Of course the acquisition of LinkedIn will hold back Microsoft’s earnings per share growth, but he likes the company’s long-term positioning as its annuity business grows. The segment was 52.7% ratable in fiscal 2016 and is expected to move to 58.5% ratable in fiscal 2017.

Wunderlich analysts also bumped up their price target for Microsoft, pushing it to $60 from $55 per share.

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