Goldman Sachs has downgraded the stock of Microsoft (MSFT), which it has largely supported since the company’s IPO in 1986 (underwritten by Goldman).Analyst Sarah Friar is frustrated by the company’s collapse in the mobile business, and thinks the consumer business should be spun out of the rest of the company (we agree).
Here’s Sarah’s logic, which includes concern that the iPad is cannibalising PC sales (which it is):
We are downgrading Microsoft’s shares to Neutral with a $28 price target, and
shifting our estimates lower by 4%, 3% and 4% in FY2011, FY2012 and FY2013.
In our view the intrinsic value of the shares cannot be realised if the status quo remains intact. We believe that top-line momentum and hence investor sentiment on Microsoft’s core Windows and Office franchises is unlikely to improve until the company gains a firmer foothold in the growing migration to mobile devices – both smartphones and tablets. We don’t see this happening this year as Apple’s iPad and iPhone plus Google’s Android operating system are well established; a Windows- based mobile device could certainly begin to garner momentum in 2011, but the stock remains in show-me mode until at least then, in our view. Hence multiple expansion remains unlikely.
In addition, we have increased caution near term on a more elongated PC refresh
cycle, combined with the newer threat of notebook cannibalization from tablets,
where Windows does not yet have a presence.
What would need to change to realise the value of the shares and potentially make us
A materially increased dividend, moving Microsoft into the top 20 dividend-paying
companies in the S&P 500 in terms of dividend yield.
A coherent consumer strategy that could involve paring back investments and/or
divesting more peripheral assets such as gaming.
Market leadership in Cloud. Microsoft has a strong portfolio of enterprise data
centre assets that could become a go-to leader in Cloud strategy, but the competitive environment remains highly in flux, with Microsoft still not a clear
“winner” in our view.
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