Citi agrees with Goldman Sachs: Sell Microsoft now
It's rare these days for big Wall Street firms to actually tell investors to sell a stock, but the Citi team, led by analyst Walter Pritchard, is doing exactly that:
We rate shares of Microsoft a Sell. We believe shares are being buoyed by excitement around new CEO Nadella and cloud services.
There's a lot of controversy around Microsoft right now, its stock price and how its new CEO Satya Nadella will be able to monetize his vision for the company.
Nadella's plans include giving away the next version of Windows, Windows 10, for a year to consumers, as well as offering free versions for small devices; pushing its enterprise customers to cloud services, some of which are low margin, in the hopes of enticing them to also buy higher margin cloud services; and bringing to market a whole new set of apps and technologies that let people work smarter, faster, and collaboratively on any platform, - not just Windows, but also iOS and Android.
While most analysts believe in the long-term vision, they remain concerned about the mid-term.
Pritchard is particularly concerned about:
- Continued decline of the PC market that is not offset by Microsoft's small share of the smartphone market.
- Cannibalization of the company's high-margin cash cow businesses, including Windows and Office, replaced by lower-margin cloud-based businesses.
- More debt on the books to offset the decrease in cash flow and still meet the promises for stock buy-backs.
- and, like all the bears these days, he also warns there could be a bigger hit from the foreign exchange rate, which is plaguing all US multinationals.
Pritchard summarized his view:
MSFT is wrestling with difficult strategic issues where we believe there are no easy answers (Windows challenges and associated consumer monetization, cloud transition / margins while maintaining developer relevance). We expect some of this to be highlighted at BUILD developer conference (Apr 29th) where Windows will be the focus. We believe these strategic quandaries are more likely to results in further multiple contraction.
Pritchard's bearish view is echoed by others like Goldman Sachs, who also rates the stock a sell.
But that view is being countered by more optimistic analysts, like Wells Fargo, who think Microsoft has a clear plan, and that stock will leap as the company shows progress in its key new areas, like cloud computing.
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