Anakyst Ross MacMillan cites five key developments at Microsoft for the call:
- A new operating structure with greater transparency on the best assets. MacMillian notes,
“BestCo” is the commercial segment that contains the key assets that are transitioning to the cloud. “OtherCo” is the Devices and Consumer segment that carries less clear value. The analyst thinks that the market will eventually ascribe higher valuation to the BestCo Commercial Segment, which houses Server Products, Commercial Windows, Dynamics Applications, Cloud Azure/Office365, and more.;
- Increased conviction around the transition to the cloud with Office 365/Azure. MacMillian has the value of Office at $20 to $22 per share and the Server and Cloud business at $10 to $12 per share. The analyst points to IDC data showing that Office has been a share gainer, particularly in the enterprise collaboration segment.
Additionally, Office 365 is making a stronger stand against an onslaught by Google (Nasdaq: GOOG) and its Google Docs platform. MacMillian said,
Our own checks with vendors that sell to the MSP/ SMB space suggest strong momentum with Office 365 versus Google.Microsoft also recently said it won back over 440 customers from Google in fiscal 2013;
- Optionality on Intel's (Nasdaq: INTC) improving competitiveness, which could drive upside to Windows;
- Increasing value of IP related to Google Android. Microsoft has claimed that Android infringes on 12+ patents and has successfully signed licensing agreements with about 20 OEMs. About 50 percent of Microsoft's phone royalties are from Android, making it an indirect play on growth in the world's most-popular mobile OS. MacMillian has that potential at $3 to $4 per share by 2017, but pegs a valuation of $2 per share on it right now.; and
- The potential for portfolio focus/better capital allocation under a new CEO. MacMillian would like to see,
an outsider that casts new eyes on the company’s core assets. We would like an individual that brings a strong operational track record and the ability to decide what Microsoft assets should remain as core and what could be viewed as non-core. Finally, we would like an individual that sees recurring cash flows that provide the opportunity for a more optimal capital structure.
Shares of Microsoft closed at $34.45 yesterday, with a 52 week range of $26.26 to $36.43.