By Tiernan Ray
Shares of Microsoft (MSFT) are down $1.46, or almost 5%, at $28.82, as the Street contemplates things that seem unthinkable, such as a breakup or a privatization, prompted by last night&’s terrible Q1 PC report, that showed a drop of between 11% and 14% in unit shipments, based on Gartner and IDC data.
But there&’s always another point of view. Raymond James&’s Michael Turits comes to the stock&’s defense, penning a note to clients that reiterates an Outperform rating on the shares and a $34 price target.
Writes Turits, &“While Windows 8 has failed thus far to deflect the downward trajectory of PC shipments, we remain optimistic about the positive impact of a larger number of cheaper touch-based devices over the next year.&”
His firm cut its own PC growth outlook to a decline of 2% for this year from a prior expectation for flat sales, and to a rise of 3% next year, better than the 1% growth they&’d previously been modeling.
Turits cut his estimates to reflect the PC drop, projecting fiscal Q3 (March) revenue of $20.17 billion and EPS of 64 cents versus a prior $20.6 billion and 75 cents. For the full year, he cuts his estimate to $78.48 billion and $2.65 from a prior $78.86 billion and $2.81.
Turits outlines things that could help a back-half-of-the-year PC pickup:
As we wrote in yesterday’s TMTalk, media reports indicate Microsoft and Intel are working to cut the price- gap between touch and non-touch PCs by roughly half ($133-167/unit). We also believe Microsoft is working with supply chain partners to lower touchscreen W8 components costs for the 2013 back-to-school and holiday seasons. Less expensive touch-screen enabled devices should spur demand for W8 devices which can take advantage of its touch-centric functionality. On the enterprise side, our channel conversations indicate a strong pipeline for W7 migrations (Microsoft reported >60% of the commercial base on W7 last quarter) with some limited enterprise W8 deployment.
More to the point, for Turits&’s purposes, he&’s looking at the other businesses aside from Windows, and believes they are holding up well:
We are reducing our F3Q non-GAAP MBD revenue growth to 2% y/y from 4% given persistent PC shipment weakness. Recall transactional revenues are 40% of division revenues and are correlated with PC shipment growth. Our checks, however, noted enterprise spend picking up for Office 2013 upgrades, Exchange upgrades, and Office 365. Lync sales continue to sound strong. With Windows XP end of support coming in April 2014, corporate upgrades to W7 remain strong. While those upgrades are not a Windows revenue event, resellers report strong pull-through of Office upgrades and SharePoint and Lync attach with the OS transition, plus increased attach of annuity contracts. Exchange 2003 Enterprise Edition also reaches end of support in April. As with XP, we believe about one-third of the installed base remains on Exchange 2003. We think upgrades to 2013 are driving annuity agreements around Exchange that were formerly transactional, and are driving migrations to Office 365 as well [...] We are expecting an in-line Server and Tools quarter following conversations with U.S.-based resellers that showed solid sales and strength in products across the server line driven by momentum around Active Directory and Hyper V, and increased capabilities of System Center for heterogeneous environment management [...] Speculation in industry media has included an announcement of the next-generation Xbox on May 21, before the E3 conference if not by year-end. The new Xbox will reportedly use AMD x86 chips to reduce costs and make it easier for developers to write new games. In addition, we think several new features from the console could include cloud-based gaming and increased functionality around non-gaming media entertainment apps. On the Windows Phone front, speculation in industry media suggests Nokia (NOK) is coming out with an additional lighter and thinner Lumia phone for Verizon, the Lumia 928.