Stifel: Time To Buy Microsoft, There's 'No Alphabet Soup Here'

In a report published Thursday, Stifel analyst Brad R. Reback upgraded the rating on Microsoft Corporation MSFT from Hold to Buy, with a price target of $55, due to increased confidence in the Commercial business continuing to witness persisting growth, with profitability growing in the aggregate Devices and Consumer (D&C) businesses.

"Although we don't expect Windows 10 to accelerate growth and retain our cautious stance on Consumer Windows more broadly, we think continued gross profit improvement across D&C and Commercial Cloud can offset Windows' decline and these positive forces should accelerate in coming years," Reback stated.

Even if the performance of Windows is muted, as expected, the analyst expects gross profit dynamics across the businesses, combined with cost control, to help gross profit dollars to grow at a more rapid pace than Microsoft's operating expenses in the coming year, with newer business, such as Office-365, Azure and Surface, gaining scale and headwinds from Nokia Corporation (ADR) NOK dissipating.

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In addition, according to the Stifel report, "Despite AWS's dominance, Microsoft is doing a solid job leveraging its privileged position within the enterprise to drive Azure adoption via its unified hybrid-cloud approach."

The analyst expects Azure to be able to achieve breakeven b FY17. On the other hand, although there have been investor concerns regarding the shift to the Cloud impacting the overall growth rate at the company's Commercial segment, the analyst believes that Microsoft is well positioned to sustain low single-digit growth for enterprise Office, while the Server business, including Azure, is expected to grow in the high single digits, driven by new product launches and workload gains.

The analyst also believes that will the decline in the Nokia headwinds, Microsoft is likely to raise its dividend by 15 percent in FY16 and FY17, with continuing share buybacks worth about $14 billion annually.

The EPS and revenue estimates for FY16 and FY17 have been raised.