Morningstar Reiterates Rating on Microsoft

Total revenue declined 2% in constant currency due to a combination of factors, including weak Phone sales, the transition from Office perpetual licenses to Office 365, original-equipment manufacturer inventory drawdown related to the upcoming Windows 10 launch, and last year's XP refresh cycle. Disappointing Lumia sales and surprisingly weak feature phone results validated management's previously announced write-down of the Nokia acquisition. Nevertheless, management looks to soldier on in its quixotic quest to gain meaningful share in the smartphone market, albeit with a much reduced product lineup. Should management stop investing in the margin-diluting phone hardware business, our fair value estimate would increase to $48.

The core commercial business remained solid, with constant currency commercial sales up 4% due to strong Server products and services (up 9% in constant currency) and cloud results (up 96% in constant currency). The company continues to see solid enterprise demand for Office 365.

Overall, despite the massive write-down and restructuring, this was a decent quarter for Microsoft. The Windows 10 launch will be crucial for the firm as management looks to stem Windows' market share slide. We view the shares as fairly valued and would wait for a modest margin of safety before investing.

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