Analyst Picks and Pans: Microsoft, NetFlix, Broadcom

What Wall Street analysts are saying about selected stocks in the news Friday

Microsoft Corp. (MSFT)

FBR Capital downgrades to market perform from outperform

Deutsche bank maintains buy

Microsoft Corp. shares were down on July 24 after the software maker reported its first fiscal year with a sales decline since 1986. For the full year, Microsoft's sales sank 3% to $58.4 billion and profit slid 17% to $14.6 billion, or $1.62 per share,

Sales for the fiscal fourth quarter, which ended in June, dropped 17% to $13.1 billion. Analysts were looking for $14.4 billion in sales, according to a Thomson Reuters survey.

Earnings fell to $3.05 billion, or 34 cents per share. In the same period last year it earned $4.3 billion, 46 cents per share.

FBR Capital analyst David Hilal said on July 24 that Microsoft's fourth-quarter revenue materially missed his estimate by 9%, and was down from the prior-year period due to weakness in PC units, server hardware shipments, and Xbox console sales.

Hilal said that the company's pro forma earnings of 36 cents per share met the Wall Street consensus due to tight cost controls.

Although he believes demand is stabilizing for both Microsoft and IT spending in general, Hilal does not expect improvement over the balance of this year.

He cut his fiscal 2010 first quarter revenue estimate from $13.4 billion to $12.3 billion and his earnings forecast from 35 cents per share to 28. cents. He cut his full year estimates for revenue from $61.4 billion to $58.2 billion and for earnings per share from $1.86 to $1.62. He also cut his $28 price target to $25.

Analyst Todd Raker at Deutsche Bank was more optimistic, saying on July 24 the results didn't change his thesis that Windows 7, a new operating system to be released in October, will be one the most successful releases ever. He maintained a "Buy" rating and a $30 price target on the stock.

NetFlix Inc. (NFLX)

Oppenheimer downgrades to underperform from perform

Janney Montgomery Scott keeps sell

A rise in DVD sales and an evolving entertainment industry led an analyst to downgrade NetFlix Inc. on July 24.

Oppenheimer's Jason Helfstein said that investors are not accounting for the long-term risks the DVD-by-mail company faces as the sector changes.

"Studios are seeking to increase revenue by expanding distribution and better aligning their economics with emerging industry trends," he wrote in a note to clients.

Helfstein said a recent Sony-Redbox distribution deal and Disney's announcement that it will package micro-SD chips with DVDs will likely make movies more accessible and cheaper for consumers.

The analyst also does not see NetFlix's stock price heading above $38.

Analyst Tony Wible of Janney Montgomery Scott says Los Gatos, Calif.-based NetFlix is overvalued, as Wall Street is not fully accounting for the changes that are taking place in the industry, the recession and costs associated with online streaming.

He kept a $34 price target.

Broadcom Corp. (BRCM)

FBR Capital maintains outperform

FBR Capital analyst Craig Berger said on July 24 that Broadcom's second-quarter results and third-quarter guidance were mixed. He noted that second-quarter revenues were at the high end of guidance (excluding a royalty payment received from Qualcomm), while the third-quarter revenue outlook exceeded investor expectations.

However, Berger said the the good revenue news has been offset by a weaker-than-expected second-quarter pro-forma product margin of 47%, reflecting more excess and obsolete inventory charges; and a less favorable product mix.

The analyst raised his 2009 earnings estimate from 84 cents per share to $1.05, and his 2010 forecast from $1.40 to $1.55, but only to include Qualcomm royalty payments in his model.

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