Goldman Cuts Microsoft's Price Target To $57, Remains Neutral-Rated

Microsoft Corporation MSFT reported in-line Q3 results, and announced Q4 guidance below expectations. Goldman Sachs’ Heather Bellini maintained a Neutral rating for the company, while reducing its price target from $57 to $54. The analyst commented that Microsoft was working through its mix shift, and potential headwinds could pressure margins.

Quarterly Performance

Microsoft reported its F3Q16 non-GAAP revenue at $22.1bn, representing 2% y/y growth, in-line with consensus expectations. This marked the first quarter in the last ten for which the company did not beat revenue expectations, analyst Heather Bellini pointed out.

Although MPC revenue was ahead of expectations, IC and PBP revenues fell short of Street estimates. Non-GAAP EPS came in at $0.62, below consensus of $0.64.

Looking Ahead

Microsoft continued its trend of announcing guidance below Street expectations. The company projected revenue of at $21.7-$22.4bn and non-GAAP EPS of $0.54-$0.59, versus consensus of $23.1bn and $0.66, respectively.

Microsoft guided to FY17 opex growth of flat to up slightly. “Management also gave color on the potential gross margin headwind as a result of the mix shift in the company’s revenues that have starkly different gross margin profiles at this point,” Bellini wrote. The company projected gross margins pressure of about 200bps for FY17.

The non-GAAP EPS estimate for FY16 has been reduced from $2.68 to $2.65. “We expect consensus EPS to come down materially as a result of its FY17 gross margin comments,” the analyst said.