Don’t expect the Surface to rescue the PC industry

Microsoft Surface Profits

Analysts aren’t impressed with Microsoft and its Surface tablets, and they expect the company to only sell less than 10 million units by the end of next June. Kash Rangan from Merrill Lynch downgraded Microsoft stock to Underperfom from Neutral, Barron’s reports, while Heather Bellini from Goldman Sachs maintained a Sell rating with a $28 price target for Microsoft stock.

Microsoft is “fundamentally tied to the PC market, which is facing significant structural challenges due to the popularity of smartphones and tablets, where Microsoft has been a laggard,” Bellini said, adding that the “company’s long-term fate will be predicted on whether Microsoft can successfully drive adoption of its new mobility offerings while also trying to slow the rate of decline in PCs.”

Bellini cut PC shipments down to 78.7 million units from a prior 79.8 million estimate for Microsoft’s Q2 FY14 ending in December – a 10% drop compared to the same period in the previous year. Similarly, the PC shipments estimate for Microsoft’s entire fiscal year 2014 ending in June next year was dropped to 303 million, a 7.6% drop compared to last year, and 1% worse than initial estimates.

On the other hand, tablet sales for the same period will be on the rise, with Bellini saying that shipments may reach 245 million by the end of June, or a 20% growth compared to the previous year, and 2% better than initial estimates. Of those, Microsoft may only ship a combined 9.6 million Surface units, up from a prior estimate of 9.3 million. Comparatively, Samsung aims to ship 100 million tablets next year.

Bellini has also revisited her pricing and margin forecast for the Surface family of tablets after taking into account the new cost scheme for Windows 8 devices and she now expects Surface revenues for Q2 FY14 to total only $259 million from roughly 400,000 combined Surface tablet sales, down from a prior estimate of $268 million from roughly 350,000 shipped units.

The Goldman Sachs analyst updated the gross margin estimates for the Surface as well, taking into account Microsoft’s Surface-related disclosures for the previous quarter.

“Gross margins were negative 55% in the quarter vs. our assumption of 5%” said Bellini, who adjusted Microsoft’s projected Surface margins to -21% and -6% for fiscal years 2014 and 2015, respectively.

Bellini maintained a total revenue estimate of $83.3 billion for FY14 for the company, while downgrading EPS estimates by a penny to $2.53. Meanwhile, Microsoft is aggressively marketing Windows tablets, but buyers so far have seemed interested in something entirely different.

Source:
Barrons
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