Microsoft's Downsizing Does Not Surprise Analysts; Remain Bullish On Cloud Driven Growth Opportunities

  • Microsoft Corp (NASDAQ: MSFT) confirmed it is reducing its headcount by roughly 10K employees, equating to 4% – 5% of the total headcount. MSFT will also incur a ~$1.2 billion charge in Q2 to account for the restructuring.

  • Mizuho analyst Gregg Moskowitz reiterated a Buy on MSFT with a $305.00 price target.

  • While Moskowitz believes the magnitude of headcount rationalization is less than some investors had hoped to see, the analyst expects MSFT will also very likely drive meaningful operational improvement outside the announced staffing level changes.

  • More broadly, despite meaningful macro challenges, the analyst remains confident that MSFT’s growth opportunities over the medium term and beyond are more significant than many realize and that it is ready for materially more tremendous success in the cloud.

  • Piper Sandler analyst Brent A. Bracelin affirmed Overweight with a $247 price target.

  • The analyst saw a challenging set-up for MSFT ahead of the results, given moderating Azure growth, further erosion in bookings, billings, and FCF metrics on payment timing shifts, and rising recessionary risks to non-cloud.

  • The -25% sell-off in MSFT from 52-week highs (vs. -15% S&P 500) partially reflects eroding investor confidence.

  • Bracelin lowered estimates and price target to $247 last week on rising execution risks and remained firmly in the camp that investors should wait to buy after the bad news.

  • While EPS could decline in FY23, the analyst still saw potential to return to double-digit growth in FY24 on cost containment efforts and buy-backs.

  • RBC Capital analyst Rishi Jaluria maintained Outperform rating and a $285 price target.

  • The downsizing does not surprise the analyst, given the widespread layoffs in the space.

  • In addition to the RIF, Microsoft plans to change the hardware portfolio (likely downsizing Surface’s footprint, which historically has been a money-losing business for the company) and consolidate real-estate leases.

  • Stepping back, Jaluria expects headcount alone could translate to $2 billion in recurring savings (or an annualized uplift of 90 bps to margins and $0.22 to EPS), vs. Microsoft’s noted $1.2 billion charge in Q2 associated with the RIF, hardware changes, and lease consolidation.

  • KeyBanc analyst Michael Turits made no changes to analyst estimates at this time.

  • Price Action: MSFT shares traded lower by 1.39% at $232.52 on the last check Thursday.

  • Photo Via Wikimedia Commons

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