ThinkEquity’s Yun Kim today started coverage of Microsoft (MSFT) with a Hold rating and a $26 price target, arguing that despite optimism about the company’s next version of Windows, Windows 8, there is reason to be concerned about what happens to prices for software as a result of “non-PC devices.”
“The stock over the past two years has been driven by investor sentiment rather than actual quarterly results, and we expect this trend to continue,” writes Kim.
Sentiment is now starting to turn positive because of the promise of Windows 8, observes Kim. However, getting Windows 8 on mobile devices such as tablets and hybrid laptop-tablets should help move units of Windows, “we are wary that potential lower pricing points of ARM-based Windows devices could marginalize much of the unit growth,” writes Kim, referring to gadgets that use chips based on ARM Holdings’s (ARMH) technology.
“Hence, we believe its revenue growth for the Windows business could lag the unit growth by a sizable amount. In our view, MSFT needs to develop an additional monetization strategy for its Windows 8 platform, such as Apple’s (AAPL) App Store, to offset this potential pricing headwind.”
Without upside in revenue for Windows, Microsoft is stuck in a period of tough comparisons for growth, and the company is likely to see single-digit revenue growth on a percentage basis, down from 12% last fiscal year, Kim thinks:
Along with a healthy rate of corporate PC refresh cycles and enterprise adoption of Windows 7, MSFT was able to show double-digit revenue growth despite facing declines in its consumer Windows business. However, going forward, we see the company stuck in a single-digit growth stage for some time due to tougher comparisons and a lack of a new major product release, especially its flagship Office Suite that was a key driver of revenue growth in FY11.
Kim is forecasting revenue of $75.4 billion in the June-ending fiscal 2012, and $82.1 billion in 2013, which is in line with consensus to slightly above.
Microsoft shares today are down 20 cents, or 0.8%, at $24.79.
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