Jefferies Doesn't Budge Its Underperform Rating On Microsoft Despite Q1 Beat

Microsoft Corporation (NASDAQ: MSFT) reported its Q1 F2017 results ahead of expectations. Jefferies’ John DiFucci said in a report, however, that the consensus had been set by lowered guidance, and that “the results were “okay” at best.” The analyst maintained an Underperform rating on the company, while raising the price target from $40 to $43.

Microsoft reported its non-GAAP EPS at $0.76 ahead of the consensus estimate of $0.68. Revenue came in at $22.3 billion, beating expectations of $21.7 billion. While lower income taxes likely added $0.03 to the EPS, another $0.01 was generated by higher “other income,” analyst DiFucci pointed out.

Gross margin, at 64.9 percent, missed the guidance of 65 percent, but was ahead of the Street’s expectation by 70 basis points. “Relative to business momentum, the results were "okay" at best,” DiFucci commented.

Concern Areas

Although Microsoft has been trying to curtail its operating expenses, these have grown in each of the last five quarters, excluding the phone business and currency, the analyst noted.

Microsoft announced its revenue guidance for the December quarter below consensus, with shortfalls projected for both the Intelligent Cloud and More Personal Computing segments.

DiFucci added that it seemed too early to give Microsoft credit for success in transforming its business. He added, “It seems the market thinks otherwise given where MSFT trades, which we consider as grossly overvalued.”

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