shares are under pressure from concerns about how the company might be affected by slowing growth in the PC market. In particular, there are worries about what comes next for the robust growth the software giant has been generating for Office 365, its flagship productivity software.
As Barron’s reported earlier, new data from IDC show that global PC shipments fell 5.1% from a year ago in the March quarter, following the spike in demand over the past two years that resulted from the Covid-19 pandemic. The figures underscore other recent data suggesting that demand for consumer PCs, in particular, will soften as more people return to working from offices.
UBS analyst Karl Keirstead pointed out in a research note Monday that the Microsoft (ticker: MSFT) Office 365 business is expected to have $35.1 billion in sales for the June 2022 fiscal year, having grown between 19% and 21% over each of the past six quarters. Office is now Microsoft’s second-largest business, after Azure, its cloud computing platform, he said.
The “Office 365 juggernaut is likely to begin a gentle deceleration,” given the high penetration rate among commercial PC users and the fading work-from-home benefit supplied by the pandemic, he wrote after speaking with industry sources. The company didn’t immediately respond to a request for comment.
Keirstead wrote that the evidence suggests Microsoft has crushed
efforts to compete with Microsoft with the Google G Suite. “Our checks argue that the Google Cloud leadership has all but given up on the goal to displace Microsoft Office 365 in the enterprise segment and has instead shifted its efforts to boost [Google Cloud’s] competitiveness against Azure,” he wrote.
Still, he said, Microsoft’s huge success in the office productivity market has reduced the remaining growth opportunity. His financial model now reflects commercial Office 365 revenue growth of 17.4% for fiscal 2023, down from 19.1% previously.
The analyst said he is also trimming his estimates for a few other elements of Microsoft’s business, including Windows, to reflect “higher risk of a PC growth slowdown.” And he now sees a possibility that management’s guidance for the June quarter could be lower than Wall Street expects. His new forecast for June quarter revenue is $52.569 billion, down from a previous estimate of $53.226 billion, and below the Street consensus call of at $52.89 billion.
That said, Keirstead repeated his Buy rating and $360 target price on Microsoft shares. The stock is likely to be viewed as a haven in the event of a downturn in the economy later this year or early next year, he said.
Microsoft was down 3.3%, to $287.33 on Monday afternoon.
Write to Eric J. Savitz at [email protected]