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Microsoft shares are falling, in part because the company gave declining profit margin guidance for the next fiscal year during its mid-July earnings report.
However, Cowen predicts the worries are overstated and the software giant will report profitability above expectations. As a result, it reiterated its outperform rating on its shares.
"We have confidence that the margin concerns on the Street will fade as the year progresses, and we remain bullish on MSFT's opportunities over both the medium and long-term," analyst Gregg Moskowitz wrote in a note to clients Monday entitled "Deeper look into FY18 margins reveals upside potential."
Microsoft has outperformed the market this year. Its shares rallied 17.5 percent year to date through Friday versus the S&P 500's 10.4 percent return. The stock is down 1.6 percent since its July 20 earnings report.
Moskowitz raised his Microsoft price target to $85 from $80, representing 16 percent upside from Friday's close.
Microsoft gave guidance of a 1 percentage point operating profit margin decline for fiscal 2018.
On the forecast the analyst said, "[T]hat's too low and ... it's very likely that organic margins will expand again this year."
Moskowitz cited how the company projected a similar 1 percentage point margin decline one year ago for fiscal 2017, but ended the year with a 20 basis point margin expansion.
"We believe total Office revenue (consumer + corporate) is poised to accelerate, Cowen's cloud survey work has increased our confidence level in Azure's [cloud computing business] long-term success, an improving annuity mix meaningfully raises visibility and reduces execution risk," he wrote. "There are multiple levers of upside to FY18 revenue and EPS (namely, Azure, O365, gross margins, phone hardware sale and mix shift)."
Microsoft shares slightly declined in early Monday morning trading.