UPDATE: Citi Downgrades Microsoft (MSFT) to Sell

(Updated - January 27, 2015 11:19 AM EST)

Citi downgraded Microsoft (NASDAQ: MSFT) from Neutral to Sell with a price target of $38. Analyst Walter H Pritchard thinks Q2 results will result in lower Street estimates, as earnings headwinds become more clear.

"Our numbers come down and street likely further, making it tough to support a stock price above $45 (15x ~$3.00). Meanwhile, Windows headwinds continue as a drag on earnings growth and in FY16 there is a wave of product launches (Windows, Office) that could impact expense run rate and focus attention on the economically undesirable consumer businesses," said Pritchard. "Our new $38 target is based on 12.5x forward FCF, at the high end of historical levels."

"While FX does weigh on revenue and EPS (as well as help OpEx), revenue guidance comes down by ~12% vs. street for Q3 while FX impact is just 4% of this. We chalk up most of the rest (~$1B vs. our est) to Windows (~40% of it) as well as lower hardware revenue (coupled with lower GM). It is now clear that WinXP expiration had boosted results in FY14 much greater than anyone anticipated (and was messaged by MSFT)," continued the analyst.

"While FX certainly weighed on the quarter and the guidance, there is more to the weakness than this. Our prior below consensus FY15 EPS of $2.73 estimate comes down to $2.58. More importantly, FY16/17 EPS comes down to $2.91 / $3.07 from $3.00 / $3.22 (street $3.15 / $3.45)," he added.

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 $47.01 yesterday.

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