Microsoft Earnings Preview: Q209

Microsoft [[MSFT]] is scheduled to report their fiscal second quarter 2009 results after the market closes on Thursday, January 22. Based on our analysis, we at are expecting MSFT to report disappointing results that fail to meet Wall Street’s expectations.


Analyst Expectations

We are forecasting revenues of $16.8 billion and EPS of $.47. This would represent a 3% increase in revenues from last year’s $16.37 billion in the same period. The current analyst consensus calls for revenues of $17.12 billion and $.50 EPS. On October 23, the company provided second quarter guidance for revenues of $17.3 – 17.8 billion and EPS of $.51 – .53.


Even Wall Street recognizes that Microsoft is not likely to meet the guidance estimates it gave back in October. The weakening economy severely pressured PC sales in the quarter. As business and consumers delay purchases – vendors are forced to cut prices to try and spur sales. This is further confirmed by Intel’s poor 4th quarter performance, where sales dropped 19% on a year/year basis.


The combination of lack of buyer demand and aggressive price cutting could lead to some difficult quarterly performances this year by the major tech companies. Currently, Forrester Research is predicting global purchases of IT goods and services to fall by 3% in 2009. While Microsoft prides itself on being able to grow faster than overall IT spending, a decline in overall spending will make Microsoft’s estimates of double-digit sales growth very challenging.


The one area that does appear to be showing strong growth is the Xbox 360. Our checks reveal strong holiday sales of the gaming console.


Share Performance

2008 was a tough year for Microsoft’s shareholders with the stock down over 45% for the year. The company underperformed both the 34% drop in the Dow Jones index and the 41% drop in the Nasdaq.



Shares are now trading at 9x consensus 2009 EPS estimates. This is below the relative valuations of their peer group. This low valuation combined with over $19 billion in cash its hard not to like this stock. We would expect that Microsoft would capitalize on the depressed valuations of 2009 to make some key acquisitions.


Recommendation: Buy with a $24 price target.


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