7 Questions For Microsoft's Analyst Day

Citi issued a report on Microsoft Corporation MSFT ahead of the company's analyst day on Wednesday. Citi rates Microsoft as a Sell with a $37 price target.

Analysts Walter Pritchard and Steven Rogers wrote, "Longer term the question of "What to do with Windows?" will prove harder for new management resolve than investors are expecting. We believe Microsoft can either be "all in" with D&C or will need to exit. We view an exit as unlikely due to the tie inbetween consumer and enterprise devices. An "all in" strategy means the company must enter new device categories that have lower margins than current ~70 percent GM including low-end phones and small form factor tablets.

"Outperformance in the stock would be driven by growth in commercial segment above current estimates and continued leverage here. Underperformance would come from in line commercial segment performance, but significant pressure on D&C margins and growth of D&C as a percent of revenue."

Related Link: Why This Asset Manager Says There Are Better Growth Prospects Than Microsoft

Citi highlighted seven questions that are key for investors going forward:

1. How does Microsoft define cloud for revenue segment reporting?
2. How much profitability is still associated with Windows consumer and how effective will new monetization means be?
3. Are large acquisitions on the table?
4. How much do launch expenses ramp up in FY16?
5. Is cloud cannibalistic or additive?
6. Are phone and Xbox strategic for Microsoft?
7. How much room is there for improvement in gross margin of lower margin businesses?

Overall, analysts are concerned that most of Microsoft's growth comes from its lower margin businesses with search, Xbox, Surface, cloud and other franchises leading the way while higher margin D&C licensing and commercial licensing see some growth headwinds. Going forward, Microsoft will be challenged as it attempts to switch its core business operations to focusing on cloud computing while remaining competitive in the phone and gaming markets.