Bulls On Parade: Wall Street Reacts To Microsoft's Q3

Microsoft Corporation MSFT's third-quarter report Thursday sent shares to an all-time high of $97.90. Are sell-side analysts still recommending investors buy the stock at this price? 

The Analysts

• Bernstein's Mark Moerdler maintains an Outperform rating on Microsoft with a price target lifted from $118 to $123.
• JPMorgan's Mark Murphy upgraded Microsoft's stock rating from Neutral to Overweight with a price target lifted from $94 to $110.
• Canaccord Genuity's Richard Davis maintains a Buy rating on Microsoft with a price target lifted from $105 to $110.
• Morgan Stanley's Keith Weiss maintains an Overweight rating on Microsoft with an unchanged $130 price target.
• Stifel's Brad Reback maintains a Buy rating on Microsoft with a price target lifted from $105 to $107.

Bernstein

Microsoft "significantly" beat estimates in its Q3 report and offered full-year guidance "significantly" ahead of expectations, Moerdler said. Encouragingly, management remains conservative relating to its margin outlook and should come in ahead of estimates, as the cloud business continues to grow and outweigh headwinds caused by an unfavorable mix shift, the analyst said. 

Microsoft's stock looks to be "less expensive" despite trading at all-time highs as the company continues to aggressively transform, with management "streamlining" the company, Moerdler said. 

JPMorgan

A bullish stance on Microsoft is justified for three reasons, Murphy said:

• A global movement toward multi-cloud architectures like Azure.
• Microsoft's exposure to large digital transformation initiatives.
• A favorable positioning for hybrid cloud architectures through Azure Stack.

Canaccord Genuity

Microsoft's earnings were highlighted by upside performance in every segment in terms of revenue and operating margins, Davis said. Bears don't have "a whole lot to poke holes at," although they could point to a slower margin ramp, he said.

Microsoft needs to oversee increased investments to achieve strong levels of growth, and this is a tradeoff investors should be willing to accept, the analyst said. 

JPMorgan forecast continuing acceleration in revenue growth and rising operating margins at Microsoft. Companies that fit this profile should see their stock outperform the market over a period of years, Davis said. 

"We have no hesitation recommending purchase of this high-quality company and promising stock." 

Morgan Stanley

Weiss lifted the price target on Microsoft to $130 in March. Thursday's earnings report validates Morgan Stanley's bullish stance for six key reasons, the analyst said:

• A revenue beat "across the board."
• An expansion in average revenue per user contributed to growth in Office 365.
• LinkedIn showed 37-percent revenue growth, with acceleration in engagement — although the segment is still an overall drag on EPS.
• Windows OEM pro, Windows Commercial Product and Cloud Services contributed to growth in the "More Personal Computing" segment.
• Margins and EPS are both moving higher.
• Server products and cloud services sustained revenue growth in the high teens. 

Weiss identified three factors worth monitoring at Microsoft:

• Azure's growth slowed from 98 percent in the prior quarter to 93 percent, but the cloud service is still growing "rapidly."
• Capital expenditures including assets acquired under finance leases rose from $3.3 billion last quarter to $3.5 billion.
• CFO Amy Hood's look to fiscal 2019 tempered expectations for Cloud gross margins.

Stifel

Investors should be "pleased" with Microsoft's ongoing "healthy" execution, Reback said. Its strong positioning across multiple secular themes — hybrid, intelligent cloud and intelligent edge, gaming — remains compelling, the analyst said.

With a favorable macro environment and management's expense discipline, Microsoft should continue delivering accelerating operating profit and free cash flow generation in the coming quarters, according to Stifel. 

Price Action

Microsoft shares were up 1.28 percent at $95.46 at the time of publication Friday afternoon. 

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Microsoft Shares On A Path Toward $130, Says Morgan Stanley