Microsoft stock drops as UBS cuts to Neutral on Azure/Office risks

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By Senad Karaahmetovic

UBS analysts downgraded Microsoft (NASDAQ:MSFT) stock to Neutral from Buy with a $250 per share price target (down from the prior $300). As a result, Microsoft shares trade about 2% softer in pre-market Wednesday.

UBS moved lower on its rating scale after a round of field checks on the cloud providers came back weaker than expected. Moreover, the analysts note that Office seat growth is likely to moderate in 2023 while Microsoft's multiple "already feels fair, not cheap."

As a result, the analysts slashed FY24 revenue estimates to $243.2 billion, although EPS estimates are raised to $11.27 - both slightly above the current Street consensus estimate.

"We'd flag: a) Microsoft's growth engine – Azure – is entering a steep growth deceleration that could prove to be worse in FY23/FY24 than investors are modeling and that (along with AWS) may be slowing due to maturation, not just a tough macro, b) Office 365 revs growth has been a remarkably steady machine of late but this seat-based business is vulnerable to a slowdown in 2023 as the installed base throttles back on headcount growth, c) margins are down y/y in 1HF23 despite a material boost from the server depreciation change and FY23 Street EPS estimates are very tied to a 2HF23 reversal of this trend despite continued margin pressures," the analysts further explained in a downgrade note.

The analysts conclude by saying they are not "making a material negative call on the stock." Instead, shares trading at 24.5x CY23E FCF "already embed a "defensive premium" and are a consensus long." Hence, UBS sees risks tilted to the downside from current levels.

Microsoft stock fell nearly 30% in 2022.