PacCrest Boosts Microsoft Target After Getting A 'Window Into Windows 10'

April 30, 2015

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In a report published Thursday, Pacific Crest Securities analyst Brendan Barnicle offered a "window into Windows 10," noting Microsoft Corporation (NASDAQ: MSFT) provided more clarity on its model transition.

Microsoft hosted a financial analyst event in conjunction with its annual Build Conference for developers on Wednesday. A webcast and transcript of the event can be found on the company's investor relations website.

Barnicle noted that heading into Microsoft's analyst meeting, investors have speculated on several ways that Microsoft could discuss its model transition. Some investors speculated Microsoft would give away Windows 10 for free, but it is clear that the company will continue to charge for Windows, but the company will defer Windows 10 revenue over three years.

Barnicle said management also guided to flat operating expenses in fiscal 2016, which is beneficial as Nokia Corporation (NYSE: NOK) related acquisition expenses will "largely also go away" next year. As such, the analyst noted that Microsoft can, in fact, increase its spending for a Windows 10 launch so long as it keeps operating expenses fixed.

Barnicle stated he is now "comfortable" in lowering his fiscal 2016 revenue estimate to $83.3 billion from $97.6 billion, while also lowering his fiscal 2016 earnings per share estimate to $1.60 to $2.64.

Shares remain Overweight rated with a price target raised to $55 from a previous $50 based on a 13.5x multiple to his calendar year 2016 free cash flow estimate of $3.47 per share, plus $8 per share in net cash.