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Google and Microsoft see shares tumble after downgrades

December 18, 2014
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Blog
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Posted by David Hobart

Microsoft and Google are licking their wounds after the two Goliaths took a tumble in the US equities market.

Microsoft shares fell 3 per cent to $45.21 in New York trading on 16th December after Bank of America analyst Kash Rangan switched its status from “neutral” to “underperform”. Its price target is now $47.

According to the Financial Times, the change of status has gone down rather well on Wall Street. It’s not a devastating blow by any means. After the downgrade and the share price slippage, it was pretty clear that Wall Street analysts still favour Microsoft: it secured just four sell recommendations, 19 hold and 24 buy ratings.

After trading in a narrow range for over ten years, Microsoft’s stock soared by 25 per cent this year, more than double the 10 per cent for the Nasdaq Composite. Mr Rangan took a cautious view of this exuberant performance, chiefly because the tech giant’s gross profit is lagging well behind its revenue growth. With the product cycle for Microsoft’s “Win Pro” OS for SMEs slowing, and the consumer Office 365 product still in transition, Rangan took the view that revenues could be dented and margin leverage rendered problematic.

Microsoft might have seen this coming. Under the stewardship of its new CEO Satya Nadella (who took over the reins from Steve Balmer in February this year), it moved away from its traditional business model based on the Windows PC OS monopoly toward cloud computing. And although this is the kind of change that can make markets twitchy, it hasn’t done a bad job, becoming the biggest supplier of cloud computing products to business in 10 months.

Google’s similar 3 per cent share price downslide can be laid at the door of JPMorgan, who cut the price target for the search and advertising behemoth from $670 to $600, and lowered projections for 2015 and 2016. The reason? Google hasn’t performed well against its peers this year: shares are down 11 per cent and, while Facebook’s stock market index (as rated on the S&P500) leapt by 37 per cent, Google’s limped upward by an underwhelming 7 per cent.

According to JPMorgan’s analysts, the downgrade reflects concerns about the shift from desktop to mobile content consumption by a growing army of users, and rising competition from Facebook.

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