Microsoft Stock Expected to Stagnate

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Microsoft stock is expected to stagnate this year owing to pricing pressure in emerging markets, uncertainty over its Nokia’s handset unit acquisition and declining appeal of the Windows operating system. Microsoft, with a market value $313 billion, ticked up 1.5 percent year to date and 38 percent in the past 12 months, according to Morningstar. It slightly outpaced the stock market, which has been flat this year while returning 22 percent in the past 12 months.

Microsoft trades at a discount to both the market and the software industry. It sports a price-to-earnings ratio of 14 versus 18 for the S&P 500 and 16 for its industry. It trades at 3.7 times book value while S&P trades at 2.6 times value and the industry trades at 3.9 times book value.

Morningstar rates Microsoft shares hold with a fair-value estimate of $39 a share, up 3 percent from Friday’s close of $37.70. Microsoft’s strong commercial software unit will continue expanding, a Morningstar equity analyst wrote in report dated March 14. Microsoft has overhauled the devices and services units of its company, offers a viable strategy for its Windows business to battle with the mobile devices universe. The Azure platform appears promising in growing into a meaningful revenue source.

The bearish argument is that demand for the Windows OS (operating system) is fading owing to a flood of new devices and operating systems coming into the market, along with a the increase in emerging market sales,  with lower-prices and lower-margins, Morningstar stated.

S&P Capital IQ also rates Microsoft hold with a $38 a share price target. Given that Microsoft stock last traded at $37.70 as of Friday’s close, it is expected to stagnate at its present price. Analyst Barbara Coffey forecasts 2014 fiscal-year sales to increase 8.2 percent and 2015 sales to lift 6.2 percent after rising 5.6 percent to $77.8 billion in 2013.

“We expect Microsoft’s server and tools area to show solid growth,” Coffey wrote in an equity report dated March 15. “We look for online services and entertainment areas to show more robust growth. Devices are a critical part of the company’s strategy, with new products in the tablet and gaming console categories having just been released in the December quarter.”

Coffey anticipates new product launches will drive sales value but prices will be pressured in emerging markets.

Microsoft has boosted dividends eight times since 2004. It plans to buy back $40 billion worth of its shares but declined to specify by when. Share repurchases should support the stock price as it provides demand for the shares. And it increases earnings per share because earnings are divided among a fewer number of shares.

Bank Of America Merrill Lynch rates Microsoft underperform with a $35 a share price target given the lack of clarity after it acquired Nokia’s handset unit. The deal still needs to overcome a few regulatory hurdles but is set to close in first quarter.

“The integration of the 30,000 employees and how to successfully run a handset manufacturing operation will be challenging, but the presence of (Stephen) Elop will hopefully allay the challenges of running the division without becoming a large of a distraction,” Kash Rangan, research analyst at BofA Merrill wrote in a client note Feb. 10.

Among the 41 analysts polled by Thomson Reuters, seven rate Microsoft a buy and five rate it outperform. Twenty rate it hold while four rate it underperform. Analysts’ price targets range from $25 a share to $47 a share with a mean of $38.60. So on average Microsoft stock is expected stagnate near its current price.

Sources

Morningstar
Thomson Reuters Knowledge (report)
S&P Capital IQ (report)
Bank of America Merrill Lynch (report)

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