FBR startlingly bullish on Microsoft (MSFT) after the firm blew Q2. Earnings missed by a penny, and most analysts thought that guidance was light. FBR disagrees:
MSFT reported a good quarter. While not perfect, given the weak economic backdrop, we thought the results and guidance were solid. From a revenue perspective, we were glad to see upside in the quarter, a bigger-than-expected jump in unearned revenue, and guidance for FY09 that exceeded previous guidance and consensus.
Microsoft’s only weakness, says FBR, was its inability to push strong top line results to the bottom line, which FBR attributed to its aggressive (and, in our opinion, futile) investment in its online businesses:
The softness in the results came from a profitability standpoint. EPS missed consensus by a penny, and guidance for the coming year is generally in line with consensus. So, while the company is able to impressively drive sales (revenue was up 18% YOY in the quarter), the upside is not falling to the bottom line. The main reason for this is the company’s efforts to increase investments, particularly in its online business.
Despite the hit to earnings, FBR thinks that inestment in MSFT’s online business is the “right strategic move,” and that in the meantime, the strength of MSFT’s core business is enough to carry it:
While this may limit margin expansion in the interim, we believe it is the right strategic move, and we believe the strength in the rest of the business (which represents 95% of revenues) can help drive overall performance despite these increased investments. Because earnings can be managed more than revenues, if we had to choose one, then we areglad to see the strength in revenues.
FBR maintains its $40 target and Overweight rating.
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