How Low Will Microsoft's Numbers Go?

In a report issued Wednesday, Citi analysts Walter H. Pritchard and Steven Rogers trimmed their estimates and price target for Microsoft Corporation MSFT. The price target is now set at $36, down from $38. The stock carries a Sell rating. Estimates were also cut, well below the Street's projections, on the back of "multiple factors including FX, lower PC units, reductions in commercial licensing as well as various modeling refinements." The analysts now expect EPS of $2.59 for fiscal 2015, $2.71 for fiscal 2016, and $2.90 for fiscal 2017. While the 2015 estimate is in-line with the Street, the ones for 2016 and 2017 are 8 to 10 percent lower. As earnings and analyst day come closer, Citi expects management to "bottom" numbers. Related Link: Microsoft Azure Vs. Amazon AWS: Who Wins? Now, "looking at sensitivity of how low numbers go," Citi shows EPS sensitivity to the eight most important levers in its model "with the takeaway being that Commercial Licensing, OpEx and D&C licensing are the biggest FY15-17 variables." The analysts believe that "with downside risk to numbers and medium-term uncertainty on multiple fronts, it is possible we see further multiple contraction (stock still trades near 5-yr multiple high)." Furthermore, the analysts see multiple contraction also deriving from several strategic quandaries, including "Windows challenges and associated consumer monetization, cloud transition / margins while maintaining developer relevance."