Piper Jaffray Raises Microsoft (MSFT) EPS, Price Target on Halo Success

Piper Jaffray analyst, Katherine Egbert, thinks Microsoft's (NASDAQ: MSFT) Halo 5: Guardians could be the company's most successful Halo so far. However this could inadvertently reduce gross margins. She expects it to spur additional software and console sales, which come on at a lower overall gross margin which is offset by a lower tax rate so the combination nets to higher EPS and cash flow and thereby a higher price target.

Guardians generated $400M in its first week. Launched October 27, Guardians was the best-selling digital title through the Xbox Store during launch week, with users logging more than 21 million hours playing the game. By comparison, Halo 4 generated $300M in first-week global sales and $220 million on its first day. 2007's Halo 3 took in $170 million in the first 24 hours in the U.S. alone.

Revenue upside in the December quarter could come from increased Xbox Live subscriptions, full game digital downloads, expansion packs, and micro-transactions (weapons, armor, skins, etc.). Despite producing revenue upside, past Halo releases have resulted in downward pressure on Microsoft's overall gross margin.

Microsoft has made up some ground against Sony's leading PS4 console via a price cut, de-bundling of Kinect and by stressing a series of exclusive content: Halo and Tomb Raider this year and Gears of War in 2016.

The firm raised FY 2016 EPS from $2.49 to $2.54 and FY 2017 EPS from $2.81 to $2.87/

Reiterate Overweight and increase price target. Applying a 15.1x multiple to the new 2016 FCF/share estimate, boosts the price target from $53 to $64.

For an analyst ratings summary and ratings history on Microsoft click here. For more ratings news on Microsoft click here.

Shares of Microsoft closed at $54.16 yesterday.

You May Also Be Interested In

• Morgan Stanley Double Downgrades AU Optronics (2409:TT) (AUO) to Underweight
• Topsports Intl Holdings (6110:HK) PT Lowered to HK$5.50 at HSBC
• Domino's Pizza (DPZ) PT Raised to $475 at Wells Fargo