As Teresa noted at length last week, there is a lively back and forth on the Street about just how Microsoft‘s (MSFT) Windows 8 is doing since its commercial debut on October 26th. The Wall Street Journal’s Steven Jones and Shira Ovide over the weekend had a summary piece regarding weak initial sales of Windows 8 PCs, citing last week’s data from NPD Group.
One item that came over the transom late Friday was an update from Davenport & Co.’s Drake Johnstone, who reiterates a Buy rating on Microsoft shares, but cut his price target to $35 from $40, and removed the stock from what the firm calls the “Analyst Action List,” after cutting his estimate for this fiscal year ending in June as a result of the weaker PC sales data.
Citing the NPD numbers released Thursday, showing a 21% decline, year over year, in PC sales in the four weeks through November 17th, Johnstone writes that this is the beginning of a sharp drop in PC sales through the beginning of next year as the market waits for better hardware:
Given that Microsoft�s PC manufacturer partners (such as Hewlett Packard) may not have a full range of new Windows 8 tablets and notebooks until mid-2013 and significant competition from smart phones and tablets, we expect global PC unit sales to decline sharply in the first half of calendar 2013.
Johnstone is predicting a 15% drop in PC revenue this quarter, following last quarter’s 33% decline.
While Microsoft’s tablet computer, Surface, may somewhat offset that, it comes with lower gross margin than software products, causing Johnstone to cut his numbers. He reduced his fiscal 2013 estimate for Microsoft’s “Windows & Windows Live” division revenue to $17.4 billion from $19.87 billion, an 8% year-over-year decline. That lowers his annual EPS estimate to $2.90 from $3, which is roughly in line with the Street’s $2.88 per share.
Our revised PC estimate results in a $1.45 billion reduction in Microsoft�s gross margin to $59.5 billion. If Microsoft sells 6 million Surface tablets in fiscal 2013 at an average price of $775, the company could generate $4.65 billion in tablet revenue (offsetting lower PC revenue), with tablets contributing $1.35 billion in gross income.
Microsoft shares today are up 6 cents, or 0.2%, at $26.68.
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