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Goldman Goes The Full Adele In Apology Note To Microsoft

Lloyd must have called Satya a thousand times.

While everyone else seemed to have recognized that Microsoft was growing stronger after years of being left in the dust by both Apple and a new generation of Silicon Valley power players, the folks at Goldman Sachs (GS) remained bearish on good old MSFT.

But now, Goldman has realized the errors of its ways and - in a research note entitled "Righting a Wrong" - is telling Microsoft hoping that, Hello, it's Goldman and asking if after all these years Microsoft would like to meet to go over everything.

We downgraded Microsoft to Sell on April 11, 2013, on the premise that Microsoft faced critical secular challenges given the deteriorating PC demand backdrop and our view that consensus earnings estimates were too high. Since that time, consensus estimates for FY14-16 have compressed 14-20%, but Microsoft’s NTM P/E multiple increased 104%. Therefore since our downgrade, shares have increased +84% versus the S&P +29%.

They say that transitioning to the cloud is supposed to heal you, and Microsoft has done some healing.

Despite out year estimates consistently compressing, we failed to appreciate that the stock would disconnect from downward EPS revisions, and the significant upward rerating of the multiple driven by MSFT’s transition to the cloud (Office 365 and Azure). We were wrong.

Goldman analysts must have forgotten how it felt before the world fell at their feet.

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. 

So Goldman is calling out from the other side, to tell Microsoft that it's sorry for breaking its stock.

We are raising our 12-month price target from $45 to $57 (equal weighted DCF, P/E, EV/FCF) due to higher out year estimates, better visibility into the cloud businesses and the expectation of continued solid execution. At ~$55, MSFT trades at 20x our CY16E EPS of $2.77 (consensus $2.94).

But before the guys at 200 West Street ask the folks at Microsoft if they ever made it out of that town where nothing ever happened, they should know that Microsoft is still based in Seattle.



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