Microsoft Smashed on Goldman Downgrade

Microsoft (MSFT) shares plunged 4.9% to $28.80 on heavy volume, as Goldman Sachs downgraded the stock. With PC trends in a sharper decline than anyone thought, what can the company do to keep shareholders happy?

Goldman Sachs analyst Heather Bellini believes the company has four “Plan B” options to really get its stock out of the range it’s been in over the last 10 years, credit crisis not withstanding. She notes that Microsoft shares are up just 3% since Apple (AAPL) launched the iPhone in June 2007, vs. a gain of 260% for Apple, and 170% for Samsung.

“We expect the shares to remain range bound (noting we have downside to our price target) especially given our view on weakness versus expectations for FY13/14 revenues and EPS,” Bellini wrote in her note.

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Of the four options, she lays out, Bellini believes cutting prices or giving subsidies is the most likely. Sales of the Microsoft Surface have been notoriously slow, with CEO Steve Ballmer previously noting sales were “modest” in their debut. The company did not mention exact sales figures on its most recent earnings, so it stands to reason sales are weak. Bellini believes Microsoft could cut the price of the tablet, or potentially lower the price of Windows to original equipment manufacturers such as Dell (DELL), HP (HPQ) and others to drive adoption. “That said, we do not think that even significant price reductions would be enough to stimulate demand,” Bellini noted.

The company’s major business lines, including Windows, are facing secular headwinds and that’s not changing anytime soon, with PC shipments declining 14% year-over-year according to IDC and 11.2% according to Gartner. Microsoft is facing the heat of a post-PC environment faster than most expected. The reception to Windows 8 has been nothing short of dismal, even though Microsoft owns 90% market share in the PC operating system space. Most of that market share comes from Windows 7, Windows Vista, and to an extent, Windows XP, which the company recently announced it would stop supporting in 2014.

Microsoft has many business lines, outside of Windows, and potentially breaking up the company could be worth it for shareholders. Bellini pegs the sum of the parts of Microsoft at $37, though she doesn’t see that as likely given the company’s synergies across its different groups.

Two more likely options are for the company to leverage its incredibly strong balance sheet, returning more cash to shareholders, or cutting expenses. Bellini believes Microsoft will generate $32 billion in cash flow from operations, with $17 billion of that pegged toward spending, buybacks and dividends. That leaves an additional $15 to return to shareholders. If the company were to leverage its overseas cash (Microsoft had $68.3 billion in cash and equivalents on its books at the end of the 2012), by issuing debt, it could further drive higher returns for shareholders. This was given a “low to medium” probability.

Microsoft is in an arms race with Samsung, Apple, Google, and others, so cutting spending is not as likely to happen as leveraging its cash hoard, but it’s something for Microsoft to consider.

http://www.forbes.com/sites/thestreet/2013/04/12/microsoft-smashed-on-goldman-downgrade/

SAN FRANCISCO (MarketWatch) -Microsoft Corp. (US:msft) was downgraded to neutral from buy by Nomura Equity Research which cited the dramatic drop in personal computer shipments. "PC units are now expected to fall 11% - 14% in the March quarter, implying accelerating headwinds in the PC business," analyst Rick Sherlund said in a note. Microsoft also was based on following an IDC report showing a 14% year-over-year drop in shipments. Shares of Microsoft were down 3.5% in pre-open trades.

http://articles.marketwatch.com/2013-04-11/markets/38447731_1_personal-computer-shipments-idc-report-pc-business

BGC Downgrades Microsoft Amid PC Industry ‘Turmoil’

BGC Partners downgraded Microsoft (MSFT) to hold from buy on Wednesday, citing concerns over a shaky PC industry.

A recent jump in Microsoft shares spurred the call from BGC, which kept its price target at $31. The stock rose 3.5% on Tuesday and continued to climb a day later, trading 1.8% higher at $30.15.

The investment firm said in a research note to clients it is concerned about “turmoil” in the PC industry, namely talks that Hewlett-Packard (HPQ) could be broken up and negotiations that would take Dell (DELL) private.

Meanwhile, research firm IDC has forecasted a sharper decline in PC shipments this year.

“Given the change in the computing landscape, it may prove difficult for the PC market to experience growth,” BGC analyst Colin Gillis wrote. “We expect PC shipment revisions to continue a negative trajectory.”

The note added that Microsoft has yet to gain traction in the market for tablets and phones despite the “quality and innovation of Microsoft’s software.”

“Any change in leadership at the company is still going to face the above problems, and there are no fast fixes for Microsoft to the current shift in computing trends,” Gillis wrote.

BGC also lowered its fiscal 2013 estimates for Microsoft to below consensus estimates.

Microsoft needs to capture its place in the tablet/smartphone market fast because we are heading to the post pc era.

microsft not selling building mean they are ok

User was banned for this post - Kantor

every single major product microsoft has ever released has basically been a blatant rip off of another company's product (windows copied mac os, zune copied ipod, surface copied ipad/tablets, xbox copied playstation/nintendo) microsoft can only emulate other companies for so long before they finally get left in the dust, which seems to finally be happening. good riddance, microsoft has and will always be a 3rd rate company in my eyes.

Moderated,

-Mr Khan

They need Surface and Windows phones to be a success.

" Bellini believes Microsoft will generate $32 billion in cash flow from operations, with $17 billion of that pegged toward spending, buybacks and dividends. That leaves an additional $15 to return to shareholders."

WTF. The investment market is sick, if all it can think about is how the rest of the cashflow can be used to boost stock price, instead of investing in future earnings by having competitive products.

I'm surprised at this, they are making so much profit. Why are they being downgraded?

Have this guy seen that "photocopy" of Kinect in Play Station 4 announcement? Probably he was too busy playing Super Smash Br... I mean Play Station All-Star. Your Sony is the one that needs to  get its act together with PS4 (one product) if it wants to survive. Nintendo is on the same boat.

Moderated,

-Mr Khan

They need it, pc industry is going down, Windows 8 isn't helping it gain traction, matter of fact its pointed out as one of the many causes the market is slowing down.  Android and iOS are the only notable mobile ecosystems out there.