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."