Citi analyst Brent Thill reiterates his Buy rating on Microsoft citing the strength of MSFT’s core businesses. Thill thinks that MSFT is cheap compared to its peers and that the company’s top-line strength outweighs its futile online investments:
Trading below our 16% est FY09 EPS growth rate, MSFT’s stock at 12x looks very attractive relative to its tech peer group and historical P/E. Investors have quickly forgotten FY08’s impressive 18% top-line growth rate and ongoing momentum in the core business. Instead, the focus has shifted to tougher comps in ’09 (est 12% rev growth) and a never ending spending spree which has produced accelerating losses in the online business (~6-8% of total revs).
Thill acknowledges, however, that in the short term, MSFT’s relentless spend on its online businesses could be a drag on OCF.
CEO Ballmer made it clear there is no set timeline for pulling back online investments. After doubling the Online operating loss in FY08 ($1.2bn vs $617m in FY07), MSFT will lose another ~$1bn, spend half of its capex (or $2bn of $4bn), and a larger portion of its M&A dollars in FY09 to help build out its online infrastructure for both the consumer and business market. And considering it looks like MSFT is shifting to Plan C, there is still a considerable risk MSFT launches a campaign entitled “we need to spend more.” There is flexibility with over $21bn in OCF/year.
But Thill insists that MSFT remains a buy as a result of the strength of its core businesses
MSFT’s remaining 90% of the business looks to be very healthy and is showing no major areas of weakness. In fact, since FY05 MSFT’s core business (client, server/tools, apps) has contributed a steady 61% op margin. And with a very diverse product cycle slate in FY09, we believe MSFT’s core
revenue streams will show relatively less fluctuation than its peer group.
Thill reiterates his $36 price target.
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