NEW YORK (TheStreet) -- Shares of Microsoft Corp. (MSFT) are down 1.18% to $46.12 in pre-market trading after Bank of America/Merrill Lynch downgraded the company to "underperform" from "neutral" with a price target of $47.
"The stock strength this year (plus 27% YTD vs. S&P plus 12% YTD) and its increased valuation at 15x CY15 P/E gives us cause for concern, especially against the backdrop of a slowing Win Pro cycle, an elongated Consumer O365 transition, the challenge of margin leverage, and sell-side enthusiasm around one-time financial moves," analysts said.
"History suggests earnings revisions ultimately catch up with stock prices, and note that in the past three years our estimates for the out years have progressively moved down 3% for each forecast year," analysts continued.
"We are cutting our FY16 D&C Licensing revenue estimate to reflect the outlook, but is more than offset by giving MSFT the benefit of the doubt for improving gross margins across the board, (D&C Licensing from 91% to 92%, D&C HW from 15% to 21.5% and D&C Other 29% to 31%)," analysts added.
Separately, analysts said, in the short term, the stock could "be propelled by cost cuts and a beat on conservative guidance, as well as a Consumer PC Cycle, Win 10 strength, or Azure profitability."
TheStreet Ratings team rates MICROSOFT CORP as a Buy with a ratings score of A-. TheStreet Ratings Team has this to say about their recommendation:
"We rate MICROSOFT CORP (MSFT) a BUY. This is based on the convergence of positive investment measures, which should help this stock outperform the majority of stocks that we rate. The company's strengths can be seen in multiple areas, such as its solid stock price performance, revenue growth, largely solid financial position with reasonable debt levels by most measures, reasonable valuation levels and good cash flow from operations. We feel these strengths outweigh the fact that the company has had sub par growth in net income."
Highlights from the analysis by TheStreet Ratings Team goes as follows:
- Compared to its closing price of one year ago, MSFT's share price has jumped by 25.41%, exceeding the performance of the broader market during that same time frame. Regarding the stock's future course, although almost any stock can fall in a broad market decline, MSFT should continue to move higher despite the fact that it has already enjoyed a very nice gain in the past year.
- Despite its growing revenue, the company underperformed as compared with the industry average of 27.3%. Since the same quarter one year prior, revenues rose by 25.2%. This growth in revenue does not appear to have trickled down to the company's bottom line, displayed by a decline in earnings per share.
- Although MSFT's debt-to-equity ratio of 0.26 is very low, it is currently higher than that of the industry average. To add to this, MSFT has a quick ratio of 2.28, which demonstrates the ability of the company to cover short-term liquidity needs.
- Net operating cash flow has slightly increased to $8,354.00 million or 1.81% when compared to the same quarter last year. Despite an increase in cash flow, MICROSOFT CORP's cash flow growth rate is still lower than the industry average growth rate of 11.86%.
- You can view the full analysis from the report here: MSFT Ratings Report