Citigroup Sees Microsoft Having Monetization Issues

Walter Pritchard of Citigroup on Thursday commented in a note that Microsoft Corporation MSFT is likely to face monetization issues due to widespread low prices (less than $200) hardware and free Windows licenses for devices under 11 inches.

According to Pritchard, “it was only a matter of time” before most consumer Windows units contribute no direct revenue to Microsoft. The analyst adds that his D&C Licensing estimates are well below the Street's estimate and is part of the reason why the analyst maintains a seven percent below street earnings per share estimate in fiscal 2017.

“The market came to grips with the challenges Windows faced from 2009-2013 with the rise of iOS and Android,” Pritchard wrote. “Recently, sentiment has improved around Windows with boost to enterprise business from XP end of life and stability in consumer PC units. Furthermore, the thesis around the stock has shifted to increasing earnings power. While consumer OEM Windows is likely approximately six percent of earnings per share, if these profits go to zero or negative over five years, we are uncertain whether the company can grow earnings per share at rates at or above the S&P 500.”

The analyst adds that if the company were to lower its fiscal 2015 operating expenditure guide of $34.2 billion to $34.6 billion, lower costs could help buffer some of the downward pressure from licensing estimates which are “too high.”

Shares are Neutral rated with a $50 price target.