Citi Sees More Downside In Microsoft 'On Lower EPS'

In a report published Wednesday, Citi analyst Walter H Pritchard maintained a Sell rating on

, while raising the price target from $37 to $38. Microsoft faced a "slightly unfavorable" revenue mix in 3Q, with more hardware and less licensing. Despite this, the company "held the line" on its gross margin, reporting it at 66.3 percent, versus the Street estimate of 66.4 percent. "Reported EPS of $0.62 was helped by ~$0.05 by favorable other inc. and we calculate "normalized" EPS at $0.57 (Citi: $0.59 / street $0.58). Operating cash flow of $6.8B was roughly in line with street $6.7B and the company bought back stock ($4.1B net) at high-end of last several years' range ($1.5-2B/Q)," analyst Walter Pritchard said. Pritchard expects the Street earnings estimate to be "reduced further by $0.10-0.15, half on FX and the other half on lower commercial licensing." The analyst pointed out that the Street was not accounting for the fact that "most of the ramping O365 business comes as a trade-off to commercial licensing." Our EPS estimate for FY16 has been reduced from $2.66 to $2.54. "We understand argument that company may be outgrowing its peers in enterprise, but this still comes with cost of subsidizing this growth through consumer investments that are likely to drag on for some time," the report added. The target price has been raised slightly on a higher multiple given the comp trading ranges.