Citi gives Microsoft a $74 price target

After a callback from Microsoft, Citi has slapped a 'neutral' rating on the tech stock and a target price of $74, slightly below its current price as it does not expect a significant impact from the new Xbox console update.

Azure, Microsoft’s cloud computing service for global data centres, has had a strong showing through 2017, with a 30% growth in commercial bookings and a healthy execution on renewals.

Citi analyst Chris Suh, who spoke to Microsoft's head of IR regarding the fourth quarter of the year, stated that guidance of capital expenditure has changed to accommodate a larger spend in the event that customer interest in Azure is larger than initially expected which was said the company saw as prudent after a positive performance in the quarter.

Microsoft has not guided operating margin in the past, and Suh also made the point that it was more focused on a combination of revenue growth and investments, rather than simply minimising operating expenses and noted that the implication on the operating expenditure of +3-4% year-on-year is because the Street consensus for revenue for the 2018 fiscal year is “too low”.

X Box One X is the next major console launch for Microsoft, coming on 7 November, though Citi noted that hardware improvements aren’t driving the gaming market as much as in prior cycles.

PC sales look to rebound past previous levels of growth and the Office 365 suite has seen adoption at a rate higher than expected.

Lastly, Citi said that a major downside risk in terms of achieving its market price is Microsoft’s continued heavy investment in “its Bing platform of services, Xbox Surface and Windows Phones”, wherein a continued lack of traction could lead to “disappointing results”.