Microsoft Corporation (NASDAQ: MSFT) has drawn more attention to itself and its products in the last week than at almost any other time in the last number of years. The Redmond, Washington company’s build conference showed off a group of technologies that turned heads. Unfortunately for investors it seems to be smoke and mirrors.
According to at least one analyst, if Windows 10 is a success Microsoft stock may be doomed to underperformance. The company’s enterprise strategy is actually put in jeopardy by the legacy operating system business according to Walter Pritchard and Steven Rogers. The analysts released a heft report on Staya Nadella’s company last week.
Microsoft fails if Windows succeeds
The analysts follow a fairly simple line of logic. If Microsoft Corporation decides to pursue Windows 10 in full force the company will be attaching itself wholeheartedly to the Devices and Consumer Hardware segment. The enterprise business has moved on from Windows, according to Messrs. Pritchard and Rogers.
Because the D&C segment is bound to have gross margins of less than the 70% coming from software and services, growth in that area will ensure a lower gross margin across the business. The Citigroup pair reckon that Microsoft will Outperform the market if its commercial business does better than expected. If the Windows business takes off, however, the analysts are expecting D&C revenue to weigh on the company and stock to Underperform.
Microsoft bets on Windows 10
The Citigroup assessment puts investors in the precarious position of hoping that Microsoft Corporation isn’t too successful with Windows 10. If the operating system is judged to be a complete failure the stock will suffer. Likewise if it’s judged to be an outsized success that will weigh on the stock.
What the Citigroup analysts reckon would be best for the company in the long term, is performance that doesn’t feel like failure but that would slowly reduce the proportion of the company’s revenues that come from Devices and Consumer Hardware.
Because of the difficulties in dealing with Windows 10, the Citigroup analysts advise that investors Sell stock in Microsoft. They have a price target of $37 on the company. On today’s market shares in the Bill Gates birthed behemoth were trading for $48.37 at open.
Failing big at Microsoft
It’s clear that Microsoft is, despite rumors about Mr. Nadella’s inclination toward the company’s hardware business, still going to give Windows 10 all it has in an attempt to secure its success. Whether or not the company will try to turn a good Windows 10 into increased sales of the Surface is what will really decide the impact of the company’s OS development.
The company could go another direction, turning Windows 10 into an OS -as-a-service business. That kind of model was explained by Microsoft CFO Amy Hood this week. The exact nature of the firm’s plans are, however, still hidden and at least some investors will be quietly hoping for moderate, constrained failure for Windows 10.