In a rare mea culpa from Wall Street, analysts from Goldman Sachs this morning upgraded Microsoft stock from “sell” to “neutral” — acknowledging that they “failed to appreciate” that the Redmond company’s share price would defy lower earnings expectations thanks to promising signs in the company’s cloud computing business.
“We were wrong,” wrote Goldman Sachs analyst Heather Bellini and her colleagues in the note to clients this morning, entitled, “Righting a Wrong.”
Here’s an excerpt from the report.
We upgrade MSFT to Neutral from Sell. Since its addition to the Sell list on 4/11/2013, MSFT is +84% vs. the S&P +29%. Despite out year estimates consistently compressing, we failed to appreciate that the stock would disconnect from downward EPS revisions, and the significant upward re-rating of the multiple driven by MSFT’s transition to the cloud (Office 365 and Azure). We were wrong. On average, out year consensus EPS estimates have declined 11% in FY15 and 13% in FY16 from one year before the beginning of the FY, yet during that time MSFT’s NTM P/E multiple has increased from 10x to 20x. …
We are increasing our out year non-GAAP EPS estimates, driven primarily by faster gross margin expansion in Office 365 and Azure. While we still believe EPS consensus for FY17 and FY18 are too high, given the ongoing successful transition to the cloud we do not see the multiple coming under pressure. As such, we believe a Neutral rating is more appropriate.
The analysts raised their 12-month price target from $45 to $57. At the time of publication, Microsoft is trading at $54.80, down 1.6 percent on the day. However, the company’s shares are up more than 15 percent over the past year, and nearly 50 percent over the past two years.
