Why This Microsoft Analyst Is Lowering Their Price Target Ahead Of Q1 Earnings

Rosenblatt Securities has reduced revenue estimates and slashed its price target on Microsoft Corporation MSFT ahead of the software giant's Oct. 25 earnings report, citing increasing foreign exchange headwinds.

The Microsoft Analyst: Blair Abernethy reiterated a Buy rating on Microsoft a Buy rating and reduced the price target from $330 to $300.

Be sure to check out Microsoft's ratings page. 

The Microsoft Takeaways: "While we believe enterprise IT spending, Digital Transformation activity, and the cloud shift trend remained healthy in the quarter, we would note that recent PC sales estimates have softened more than we anticipated in Q1, and forex headwinds have increased from last quarter’s report," Abernethy said in a Thursday note. 

The analyst firm reduced its earnings forecast for Microsoft by 1%, noting the company generates less than 50% of its revenue from outside of the U.S.

Given that the euro is still declining against the dollar, the foreign exchange rates Microsoft will have to pay will bite into a chunk of its earnings, he said. 
Also read: UBS Expands Microsoft Cloud Partnership To Accelerate Its Digital Transformation Ambitions

Rosenblatt also noted a small negative operating headwind from the reduction in business in Russia.

The firm expects Microsoft to post total bookings of $49.32 billion vs. the consensus estimate of $49.82 billion, of which Productivity and Business Processes revenues will account for $16.2 billion; Intelligent Cloud revenue,  $20.37 billion; and More Personal Computing revenue, $12.84 billion.

“Our $300 target price, based upon our blended average, implies a 26% return from current levels. We assume low double-digit growth over the medium term. The stock is trading at 7.8x EV/S, which we view as being towards the upper-end of comparable large cap enterprise software vendors,” Abernethy said. 

“Our $300 target price equates to 9.0x EV/S on our FY24e. Given interest rate and multiple compression headwinds, we have trimmed our EV/S multiples to 8.5x-9.5x (was 9x-10x), P/E multiples to 23x-26x (was 25x-30x) and our EV/FCF multiples to 26x-28x (was 27x-31x).”

MSFT Price Action: Shares of Microsoft were trading 0.47% higher at $237.60 Thursday afternoon. 

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