Gains for Microsoft could be limited going forward, according to BMO Capital Markets. The firm on Friday cut is price target to $305 from $345. The new price target is still 20% above Thursday’s close of $254.08. “While we continue to find MSFT’s valuation attractive and its risk/reward favorable, we are lowering our target price owing to: 1) further compression across software valuations and 2) macro headwinds from a potential recession and the related impact to the PC market,” wrote analyst Keith Bachman in a Friday note. BMO also lowered its June quarter and full-year revenue estimates for Microsoft as the dollar strengthens. “FX headwinds have increased in the past several weeks as the dollar has continued to strengthen,” Bachman said. “We believe FX will impact reported results in the June quarter as well as FY23 guidance, and thus we are lowering our reported revenue forecasts for the next five quarters.” Due to foreign exchange pressure, BMO now expects Microsoft’s reported revenue growth for the quarter reporting in June to be 12.6% year over year, down from its previous forecast of 14.8% growth. The firm also lowered its operating margin and free cash flow margin estimates for 2023, but expects margins to expand modestly in 2024 and estimates that reported revenue growth will increase to 12.6% from 12.1% in the same year. The U.S. dollar has been on a tear this year, rising nearly 13% against a basket of currencies. This dollar strength could put pressure on companies that have a significant portion of their revenues come from outside the U.S. BMO also pointed to further compression across software valuations and the impact of a potential recession on PC markets for its target and estimate reductions. Still, BMO maintained its outperform rating on the stock. “We continue to believe that MSFT has both good offensive and defensive attributes and can generate strong revenue growth, even amid incremental macro headwinds and inflation risk, and valuation is supported by robust FCF metrics,” Bachman said. “Over the past eight quarters, MSFT has delivered reported revenue upside of ~3% on average relative to consensus expectations.”
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