Salesforce.com (CRM), Microsoft (MSFT) Autodesk (ADSK) Potential Most Exposed Software Companies to Biden Tax Plan - Morgan Stanley

June 1, 2021 9:46 AM EDT
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Morgan Stanley analyst Keith Weiss’ analysis of the Biden administration's proposed tax changes on eight software companies shows a roughly 7.6% average impact to '22 EPS. Among these stocks, Salesforce.com (NYSE: CRM), Microsoft (NASDAQ: MSFT), and Autodesk (NASDAQ: ADSK) are potentially the most exposed.

According to Weiss, the market is “over-simplifying estimated tax impacts” as it tends to focus only on US profit mix.

“Our proprietary Morgan Stanley analysis takes a more detailed approach – looking at pretax profit exposures and 10-K income tax footnote details (e.g., tax credits, stock based compensation deductions), and modeling potential foreign tax implications, such as the Global Intangible Low-taxed Income (“GILTI”) min tax and the effects of losingForeign-Derived Intangible Income (“FDII”) export benefits. Our estimated EPS impacts are forward looking and compares with 2022 consensus. As consensus typically adjusts out stock compensation in headline earnings, we also remove stock comp effects from our primary estimates for a cleaner comp,” the analyst said in a note.

The base case scenario for a hike in taxes developed by Morgan Stanley includes a headline rate increase only to 25% and an effective global minimum rate increase only to 15%.

“We expect EPS to decline by ~7.6%, on average, if the full Biden plan was enacted. That impact falls to ~4.6%, on average, under the alternate scenario projected by our strategists. This compares to an estimated ~8% impact for the S&P 500 if the full Biden plan is enacted and a ~4% impact under our alternate scenario.”

Here’s the EPS impact on 8 targeted software companies: CRM 17.4%, MSFT (9.4%), ADSK (8.9%), Intuit (NASDAQ: INTU) - 7.4%, Oracle (NASDAQ: ORCL) - 6.2%, Adobe (NASDAQ: ADBE) - 5.4%, VMware (NASDAQ: VMW) - 4.1%, Veeva Systems (NASDAQ: VEEV) - 1.7%.

On CRM, in particular, Weiss comments:

“The Biden administration's proposed tax changes imply PF tax rate of 35.3% vs. 2022 consensus estimate of 21.7%, resulting in an implied ~-17.4% impact to EPS. Salesforce is primarily exposed to domestic headline rate risk given its profit mix is currently highly concentrated in the US. This is partially offset by benefits from R&D tax credits.”

Microsoft, on the other hand, is potentially exposed to both US headline rate increases and GILTI taxation.

“The Biden administration's proposed tax changes imply PF tax rate of 24.1% vs. a FY20 tax rate of 16.5% and a2022 consensus estimate of 16.3%, resulting in an implied ~-9.4% impact to EPS,” the analyst commented.



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