BofA Highlights 'A Number Of Positive Catalysts' For Microsoft In 2017

While investors appear concerned regarding a slowing in product revenue for Windows Server and the lower than anticipated June quarter guidance, Kash Rangan of Bank of America Merrill Lynch believes that there could be various positive catalysts in FY17 that could drive Microsoft Corporation MSFT shares higher.

Rangan maintained a Buy rating on the company, with a price target of $65.

Positive Catalysts

The analyst expects Intelligent Cloud to accelerate in FY17 and believes that investor concerns regarding Windows Server declines in FY17 are unfounded, with revenues expected to grow about 5 percent.

“For a roughly flat overall scenario, server transactional revenue would need to decline 35 percent Y/Y. And all of this is before a previous product cycle with Windows Server 2016,” Rangan explained.

A potential price hike could lead to an overall increase of $3.4 billion to server product revenues. One-third of the benefit would be seen in FY17, given that three-year enterprise agreements result in $1 billion in incremental revenue annually on renewal.

Gross Margin

Given that Azure currently records -10 percent to -20 percent incremental gross margin, Rangan pointed out that “many investors see it as a foregone conclusion that margin improvement will likely be much farther out in the future.”

However, the analyst expects increasing gross margins of 5-10 percent by FY17, with an additional $1.6 billion added to the revenue at the end of FY17.

Another catalyst for FY17 could be the Win10 corporate upgrade cycle, with prior cycles leading to a peak in revenue.