Morgan Stanley: Get Aggressive On Microsoft After Any Pullback

• Microsoft Corporation MSFT shares have jumped 26 percent over the last three months, crossing the $55 mark for the first time this year in December.
• Morgan Stanley’s Keith Weiss maintained an Equal-Weight rating on the company, while raising the price target from $55 to $57.
• While investors may be focusing on Street estimates being too high, a deeper analysis of key cloud transition metrics “gives us increased comfort with the risk profile,” Weiss stated.

Consensus forecasts point towards Microsoft’s return to mid-teens EPS growth, and investors are now focusing on potential risks to this expectation, analyst Keith Weiss said. He added that Microsoft’s shares are up 18 percent year-to-date, and now more fully reflect the return to mid-teens EPS growth.

Weiss enumerated the key risks:
Potential for an upward inflection in the pace of the cloud transition to negatively impact near-term revenues and operating profits
“In their May quarter, a 17% decline in license revenues pushed total revenues down 5% at Oracle, significantly below consensus. With an 86% annuity mix within the Commercial business, the risk of abrupt impacts from a cloud transition at Microsoft are significantly lower compared to Oracle with 39% transactional revenue,” the Morgan Stanley report noted.

Volatility in Windows OEM units and ASPs
These metrics have historically been volatile and have often resulted in downward revisions in EPS estimates. Higher ASPs from the Win10 release partially offset the adverse impact on EPS from Windows OEM from an estimated -$0.15 in FY15 to -$0.04 in FY16. However, ASP improvements are unlikely to be durable, and the EPS drag could growing to -$0.12 in FY17, the analyst said.

Talks with management “gave us increased comfort the risks are manageable and bolstered our confidence in the magnitude of the opportunities afforded by the cloud transition,” Weiss commented.