Microsoft Gets Big Upgrade At Bank Of America; Cloud Has Upside

The share price of Microsoft Corporation MSFT has declined 5.93 percent year-to-date.

Kash Rangan of Bank of America Merrill Lynch has upgraded the rating from Underperform to Neutral, while raising the price target from $39 to $46.

Although the stock has underperformed year-to-date, Rangan believes that the company would see easier comps in 1H16 and that its dividend yield and P/E make it a defensive stock during times of uncertainty.

Analyst Kash Rangan expressed optimism regarding the margin upside related to Microsoft’s cloud offering, saying that there could be two main effects of the transition to the cloud – “one one relates to the switch of Commercial Office users to Office 365 subscriptions with potentially different gross margins.”

If margins continue to beat expectations, the positive impact on the EPS could be larger than anticipated.

The second effect of “transitioning non-annuity users to annuity, even in a bear case, the EPS contribution from Office could trough at $0.34 in FY16 before growing to $0.67 in FY18,” Rangan stated. However, Rangan also expressed concern regarding the Windows 10 deferral recognition and the impact that free upgrades would have, along with the possibility that cloud transition could take longer than expected, among others.

Rangan also mentioned that “the recasting of the financial reporting will make it tougher to gauge the progress of the cloud businesses and understand the trajectory of the Windows business, important barometers of health.”