Goldman Sachs on Microsoft: Sell now
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But Bellini and crew think that Microsoft's major businesses have major issues:We see headwinds to three key areas of Microsoft's business: (1) D&C licensing, (2) commercial licensing, and (3) gross margins due to its revenue mix shift. We note that the first two businesses make up 70% of revenue and 93% of Microsoft's total gross profit. ... We are reiterating our Sell rating on Microsoft, as we continue to see risk to both revenue and EPS forecasts for the remainder of this fiscal year, as well as for FY16 and FY17. While we continue to believe that management is making the right moves as it goes down the path of transitioning towards a cloud and mobile first business model, we see consensus estimates as too aggressive.
Bellini and team believe this for a bunch of reasons:
- Windows faces a hard comparison against last year when businesses were rushing to update old XP machines after support for XP ended.
- The all important Commercial unit, which includes sales software and services to companies and has made up 51% of Microsoft's revenue and 66% of its profit over the last six months, faces a tough comparison because Microsoft previously raised prices dramatically on many of its most popular server products.
- The free upgrade to Windows 10 won't bring in a lot of money for Microsoft until at least FY2016, and even then, much of it will likely be deferred and recognized slowly over time, as is typical. (The analysts note that their bearish view doesn't include a surprise early success for Windows 10 revenue, as Microsoft hasn't yet revealed how it will handle the accounting details of the upgrade yet.)
- Microsoft doesn't have a lot of room to cut costs to make up for a drop in revenue, as it's not likely to do another big layoff and needs to actually raise salaries to compete for tech talent.
- Sales of PCs overall are predicted to be flat by multiple market research reports.
- Microsoft is shifting enterprise customers away from products that are highly profitable up front like Microsoft Office, to cloud versions like Office 365, where revenue is collected over time and margins are thinner.
This all adds up to a very rare thing these days: a major Wall Street firm telling investors to sell.
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