A Surface device on display at a Microsoft store.
Peter Summers/Getty Images
Microsoft stock is coming under selling pressure on Tuesday after cautious commentary on the outlook for the software giant from Morgan Stanley analyst Keith Weiss.
Weiss keeps his Overweight rating on Microsoft (ticker: MSFT) shares, but trims his target price to $354, from $372. While still bullish for the long run, he’s worried that the company’s growth rate could be impaired by macroeconomic forces in coming quarters.
“Signs of decelerating IT budget growth expectations and a weakening consumer warrant increased focus on the durability of growth,” Weiss writes. “Microsoft screens well relative to many software peers, but is not immune to macro.” Among other issues, the company will have to navigate a sharp slowdown in personal-computer demand, which appears to be spreading from the consumer sphere to commercial PCs.
Weiss notes that most of Microsoft’s revenue comes from recurring “annuity” business from commercial customers, which should allow the company to weather any economic storm better than many other software companies.
But the analyst sees risk to other parts of the portfolio, including consumer-facing segments and “more transactional” elements of the enterprise business. He trimmed his estimates for the June 2023 fiscal year, adjusting the outlook for Windows, Surface, gaming software and hardware, and consumer-facing elements of LinkedIn and Search.
In a worst-case scenario, he adds, the combined softness in those segments could trim fiscal 2023 earnings per share by nearly $1 a share, or about 9%.
Microsoft is expected to report June quarter financial results in late July. Current Street estimates call for revenue of $52.5 billion and profits of $2.30 a share; Weiss sees revenue of $52.2 billion and EPS of $2.26.
Weiss trims his EPS outlook for both the June 2023 fiscal year, and for fiscal 2024, by about 1%. He cuts his fiscal 2023 revenue outlook by about 1.2% for the company’s “productivity and business processes” segment, which includes Office and other applications software, and by 3.1% for “more personal computing,” which includes Windows, Surface, Xbox, and Search, among other things.
Microsoft recently trimmed its guidance for the June quarter to reflect more intense pressure than expected from foreign exchange rates, reducing its revenue forecast by $460 million, and the EPS outlook by 3 cents. The new target range calls for revenue of $51.94 billion to $52.74 billion, with profits of $2.24 to $2.32 a share. Note that the revised outlook only reflects foreign-exchange impacts through May 31.
Microsoft stock is down 2.7% in recent trading to $257.48.
Write to Eric J. Savitz at eric.savitz@barrons.com
Source: barrons.com
