Here's Why Microsoft Corporation Shares Might Underperform

Does this analyst make a good case? Or from is it just more noise Wall Street?

Brian D. Pacampara, CFA
Brian D. Pacampara, CFA
Apr 14, 2014 at 11:40AM
Technology and Telecom

While Fools should generally take the opinion of Wall Street with a grain of salt, it's not a bad idea to take a look at particularly stock-shaking analyst upgrades and downgrades -- just in case their reasoning behind the call makes sense.

What: Shares of Microsoft (NASDAQ:MSFT) traded sluggishly on Monday after Deutsche Bank downgraded the software behemoth from buy to hold.

So what: Along with the downgrade, analyst Karl Keirstead planted a price target of $42 on the stock, representing just 7% worth of upside to yesterday's close. So while momentum traders might be attracted to Microsoft's price strength over the past year, Keirstead's call could reflect a growing sense on Wall Street that its valuation is becoming a bit stretched.

Now what: According to Deutsche, Microsoft's risk/reward trade-off is pretty balanced at this point. "At the time that we assumed coverage of MSFT shares in January 2014, our bullish call was rooted in a number of pending catalysts, including the CEO change, the likelihood of a big Xbox One print, a stabilizing PC market with better-than-expected business PC sales, share gains in enterprise software and our belief that Street sentiment toward the megacap incumbents (MSFT& ORCL) was too negative relative to the high-growth disruptors," said Keirstead. "Many of these catalysts have now played out, and the nearest-term event (closing of the NOK deal) may be a net negative." With Microsoft shares still trading at a reasonable forward P/E of 13, however, long-term shareholders might do well to take Deutsche's downgrade with a grain of salt.