Jefferies & Co’s initiation of Microsoft ($MSFT) at Underperform on Friday took the wind out of the stock’s sails on what would otherwise have undoubtedly been a good day. Analyst Joe DiFucci slapped a $40 target on $MSFT, nearly 20% below the stock’s current level, due to in part to the stock’s strong performance this year (up 27% year to date, 12% since the October low) but also due to the thesis that demand for personal computers will continue to slide, Windows 8 was a dud, and Microsoft doesn’t have any immediate tricks up its sleeve. Meanwhile, the company’s $7 billion purchase of Nokia’s legacy phone business is increasingly looking like an albatross.
On the other hand, the company’s Surface tablet has slowly gathered momentum, reaching positive gross margins last quarter, and the company’s cloud products are unequivocally shining. Office360 is the jewel in the crown, growing users to 7.1 million from 5.6 million in the third quarter, and nearly doubling the commercial license count. The shift to the cloud will only accelerate, which means the company’s lock on business productivity software provides an effective monopoly in a very loyal and profitable segment. Even legions of Gates-hating Macintosh owners use Word, Excel and PowerPoint every day.
DiFucci suggests that the stock’s gain this year takes all this into account. Moreover, a portion of it is attributable to cost cutting and the market’s early expectations of new CEO Satya Nadellal. The go-forward fundamentals remain challenging, with the difference that the stock now has quite a bit of air under it.
78 Vetr.com users are following Microsoft, with 19 active ratings split between 36% buys, 21% holds and an eye-popping 42% sells. It is rare indeed to see the ratings on such a popular stock diverge so completely. Expectations are both tepid and inverted – the average 6-month price target is $52, only 8% higher than the stock’s current price, while the $47 12-month target is actually slightly lower than the current price.
From a contrarian perspective, the high number of sell ratings on such a bellwether tech stock suggests Microsoft may have a lot more room to run. For what it’s worth, in October 15 Wall Street analysts rated $MSFTa buy or strong buy, a whopping 17 rated it a hold, and only three rated it a sell. The Wall Street penchant for playing it safe – no one ever got fired for buying Microsoft – seems to be alive and well.
What do you think about $MSFT? Should investors buy the dip, or steer clear? Make a rating!