Following its meetings with Microsoft Corporation (NASDAQ: MSFT)’s Kristin Chester, senior finance manager of investor relations, Cowen said in a note that it remains bullish on the company’s opportunities over both the medium and long term.
A Trifecta Of Catalysts
Analysts led by Gregg Moskowitz highlighted three catalysts that could generate excitement among Microsoft investors, including:
- Cloud computing platform Azure’s strong growth prospects.
- Better Office 365 Adoption and ARPU.
- New Xbox One X console
Outpacing The Overall Public Cloud Market
Cowen said Azure continues to grow at a faster rate than the overall public cloud market due to:
- Its strong enterprise presence and relationships.
- More cloud certifications.
- Ability to deliver end-to-end infrastructure.
- It being a hybrid cloud, in providing for workload migration, identity and manageability.
The firm believes Microsoft’s upcoming Azure Stack will help Azure further extend into hybrid cloud and edge computing environments over time.
Office 365 To Sizzle With Better Adoption And ARPU
Cowen noted that Microsoft expects the pace of adoption of its high-end Enterprise E5 SKU to be “measured,” although remaining clearly bullish on the longer-term prospects. The company is convinced about E5’s ability to drive ARPU higher, the firm added.
The firm also indicated that components of E5 can be bought at a lower rate, with some of the security technologies within E5 being the fastest adopted components.
Cowen expects Office 365 gross margins for fiscal year 2017 to be 68 percent. This, according to the firm, is reasonably near what Microsoft had previously indicated to be “steady state” SaaS margins. That said, the firm believes greater premium SKU adoption would naturally drive additional opportunity.
Xbox One X: This Scorpio Has The Zing
Cowen noted that Microsoft would be unveiling its new Xbox One X, formerly code named Project Scorpio, at this week’s E3 conference. The firm indicated that the product is scheduled to be launched on Nov. 7, just ahead of the holiday season, at a retail price of $499, which is a $100 premium over Sony Corp (ADR) (NYSE: SNE)’s PlayStation Pro 4.
The firm raised question regarding whether consumers would view the enhanced hardware as adequate justification for the price differential. Meanwhile, the firm feels the recent price reduction on the Xbox One S would drive volumes, helping to keep the ecosystem strong.
Cowen reiterated its Outperform rating and $76 price target for the shares of Microsoft.
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