Microsoft Corporation (NASDAQ:MSFT) should consider selling its Bing and Xbox businesses units, according to one of the prominent analysts on Wall Street.
Nomura Equity Research analyst Rick Sherlund cited that two businesses of Microsoft Corporation (NASDAQ:MSFT) are not material to the long-term profitability of the software giant. He also emphasized that there is an increasing demand for change in the company.
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“There may be a shift in the wind upcoming for Microsoft, with shareholders potentially demanding a greater say in the direction of the company and how it might be run to drive a better return to shareholders,” wrote Sherlund.
Microsoft (MSFT)’s Xbox One Introduction
Last week, Microsoft Corporation (NASDAQ:MSFT) introduced its new Xbox One. According to the company’s senior marketing manager, Greg Sullivan, the company plans to integrate Xbox One with Windows Phone.
Sherlund opined that Microsoft Corporation should not focus on Xbox, citing that the business is not good enough. He recommended that the software giant should look for buyers, particularly a consumer electronics company like Samsung Electronics Co. Ltd (LON:BC94) (KSE:005930). He speculated that the South Korean electronics company or other interested buyers might be willing to pay a few billion dollars to boost its business.
According to Sherlund, “Xbox is one of the areas of success for Microsoft and is cool to consumers, but it is perhaps time to assess whether this can ever be material to the overall company.”
In addition, Sherlund said, “Shareholders might want to know if they could be possibly better if Xbox were spun out as a separate company or sold. Either way, it is not material to the overall valuation of Microsoft, and will not likely determine the success of Microsoft going forward; it’s not just profitable enough to move the needle that much at the company.”
Sherlund expressed a similar opinion about Microsoft Corporation (NASDAQ:MSFT)’s search engine business. The analyst emphasized that he likes Bing as a service, but he explained that the business should be evaluated from an ROI and strategic perspective.
Sherlund pointed out that Microsoft Corporation (NASDAQ:MSFT) could generate a profit of $1 billion and positive FCF if it could sell or even give Bing to Facebook Inc (NASDAQ:FB) or Yahoo! Inc. (NASDAQ:YHOO) to eliminate its operating costs. The company would also get a Traffic Acquisition Cost (TAC) back to monetize the traffic that Windows/Internet Explorer or Xbox in the living room can drive to Bing.
“He estimated that the profit could add nearly 1% incremental to the dividend yield if returned to shareholders.”
Nomura Equity Research increased its price target for shares of Microsoft Corporation (NASDAQ:MSFT) from $32 to $38 per share. Sherlund said the increase was based not fundamentals but on their view that there may be much more focus on shareholder value as a result of potential shareholder initiatives.