Microsoft (MSFT 3.66%) stock slipped 2.5% through 2:25 p.m. ET Thursday after Stifel analyst Brad Reback lowered his price target on the tech stock this morning, and maintained only a “hold” rating.
Reback thinks Microsoft stock is worth $400 a share — and it costs less than $357 as of this writing — but that’s still not cheap enough to convince Reback to rate it a “buy.”
Image source: Microsoft.
Why not buy Microsoft stock?
Why not buy Microsoft at a 12% discount to its real value? Primarily, because Microsoft may disappoint a lot of investors when it reports earnings next month.
Earnings are due out on July 29, and the consensus is that Microsoft will earn a healthy $4.24 per share this quarter — up 16% year over year. That sure sounds good, but be warned, says Reback. Microsoft’s Azure computing business is growing four times as fast as the rest of the business and represents an ever-larger percentage of the company’s total business. Again, this sounds good, but gross margins at Azure are compressing as Microsoft spends heavily in the artificial intelligence race.
Reback forecasts that “thanks” to Azure, Microsoft’s fiscal 2027 gross margins will decline 4.5 percentage points from last year, to 63%, and miss consensus targets by at least 300 basis points.
Today’s Change
(-3.66%) $-13.37
Current Price
$352.10
Key Data Points
Market Cap
$2.7T
Day’s Range
$349.20 – $364.23
52wk Range
$349.20 – $555.45
Volume
2.6M
Avg Vol
36.2M
Gross Margin
68.31%
Dividend Yield
0.97%
What it means for Microsoft stock
More and more revenue coming from a division that’s suffering increasingly worse-than-average profit margins? That most certainly does not sound like good news for Microsoft stock.
When viewed in conjunction with what’s happening on the cash flow statement, where heavy capital spending on AI has left Microsoft with essentially no free cash flow growth at all for the past two years, and it’s hard to make the argument that Microsoft stock is still worth buying.
Rich Smith has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Microsoft. The Motley Fool has a disclosure policy.
