Wells Fargo: 'We like the new Microsoft,' so DON'T sell the stock


Satya Nadella Microsoft


Microsoft CEO Satya Nadella

Is Microsoft's stock a good buy right now, hovering at about $41? Or is it overpriced, with another drop looming when management fails to meet consensus revenue and profit targets?


In new research note, Wells Fargo thinks it's a good buy. The team, lead by senior analyst Jason Maynard, just upgraded the stock to "outperform," with a target of $46-50. Those prices would put the stock at or near 15-year highs, and within spitting distance of its all-time split-adjusted price of $53.98 in 1999 just before the Internet bubble burst.

Maynard and team completely contradicted a research note issued by Goldman Sachs last week that advised investors to sell. The GS team believed the Street didn't fully understand all the headwinds that are hurting Microsoft's major businesses.

Pshaw, is the general answer from Wells Fargo's Maynard and team. While Maynard did agree with Goldman that the Street's consensus estimates were too high and "clearly need to come down," he notes that the "shares are down over 12% in 2015." That means the stock has already corrected for its previous high, from the boost Microsoft got when businesses rushed to upgrade from XP.

He writes:


In our view, management is making sound moves that should benefit the business in the intermediate and long term. We think the strategic position has improved with the new cloud/mobile product introductions, the "software anywhere" cross-platform approach, and disciplined cost controls. ...We like the new Microsoft.

  • He's bullish on Microsoft's clouds. This includes, Azure, the one that competes with Amazon and Google and Microsoft Office which now spans the Windows PC, the cloud as well as iOS and Android.
  • He likes Microsoft's general message that it is "reclaiming worker productivity" and fending off Google Apps in the process.
  • He also thinks general "sentiment and perception" of the company "has improved substantially over the last year."

That said, he does see a few rough spots.

  • Windows is a "work in progress," he writes, agreeing with Goldman that Windows 10 probably won't have much of an impact on financials for a while. (Microsoft hasn't yet discussed how its going to account for the free upgrade and potential deferred revenue on its books.) Meanwhile, Microsoft is experimenting with new revenue models to make up for free Windows 10, everything from its new Surface PCs to its app store.
  • He also predicts more layoffs could be coming. Actually, both of these analysts indicated that Microsoft may not have cut costs deep enough to fend off the hit from its transformation and the rough foreign exchange plaguing US multi-national companies.

Goldman believes that Microsoft will not cut more people, needing to compete in the tech talent wars.

But Maynard predicts: "We believe that there is one more round of estimate cuts needed to reflect market conditions and a tougher FX environment."

We'll see. Last week, Microsoft laid off a few hundred more people, mostly from its IT group, and said this was the last of the big cuts from its largest layoff in history, the 18,000 people it cut since last summer after it swallowed Nokia.


But overall, Maynard sees a "reinvigorated" company "under CEO Nadella's regime."

They are open to new approaches more than ever, and are embracing, not fighting, the disruption brought by mobility. The harsh reality is that every 15 years or so the technology industry undergoes a platform shift brought on by new innovation. ... It's hard to disrupt your own cash cow franchise, as its always easier being the hunter instead of the hunted. But now it's fair to say that Microsoft has made that leap.

Which of these opposing points of view is right? We'll find out on April 23, when Microsoft releases its next earnings report.

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