‘This New Model Is More of a Black Box,’ Says Analyst About Microsoft

Last month, Microsoft (NASDAQ:MSFT) announced a restructuring of some of its business units and adjusted revenue projections for those segments to reflect the changes.

Some examples from the rejig include Enterprise Mobility + Security (EMS) and Power BI per user revenue shifting from Azure (within Intelligent Cloud) to Microsoft 365 (M365) Commercial Products and Cloud Services (in Productivity and Business Processes), while Windows Commercial Products and Cloud Services revenue in Windows (as part of More Personal Computing) will now be reported in M365 Commercial Products and Cloud Services (in Productivity and Business Processes).

The anticipated outcome of the changes will be a reduction of the IC and MPC F1Q25 revenue guide by $4.8 billion (EMS + Power BI) and $2.65 billion (Windows Commercial), respectively, but a boost to PBP revenue by the same amount of $7.45 billion, so there’s basically no change to the total revenue guide.

Guggenheim analyst John DiFucci thinks that some of the changes – such as transferring EMS out of Azure to M365 – should have probably taken place a long time ago, so doing them now is “better late than never.”

However, DiFucci, who ranks amongst the top 1% of Wall Street stock experts, is no fan of the new structure. “Unfortunately,” he explains, “no historical data was provided, and while we’ll get y/y growth metrics as Microsoft reports the next four quarters, that simply isn’t much to gauge how these businesses have progressed over time.”

DiFucci thinks that even with the same interpretation of what the changes achieve, they can be interpreted in two completely opposing ways. On the one hand, they can raise concern, as they “obfuscate any deterioration of the underlying fundamentals” of the most critical business units. On the other hand, they might offer reassurance, for the same reason, especially considering CFO Amy Hood’s remarks during the F4Q24 conference call that improvements are expected in the second half of FY25.

It looks like DiFucci leans into the former view. The analyst understands the reasoning behind some of the revenue allocation changes, but – particularly due to the absence of historical data – he thinks it “significantly impairs investors’ ability to gauge business momentum across core businesses (Azure, O365 Commercial).”

DiFucci also makes the case that it is not “entirely implausible” to speculate that the company may have made these changes with the intention of boosting growth figures for one of its key focus areas, Azure. “We understand that it makes the growth metric for Azure cleaner (without EMS and Power BI, but now there’s some Search and News Advertising there that wasn’t before), but do not understand why the company wouldn’t disclose any historical information,” the 5-star analyst further said.

Calling the new model “more opaque, or a blacker box,” DiFucci remains on the MSFT sidelines with a Neutral rating and no fixed price target in mind. (To watch DiFucci’s track record, click here)

However, DiFucci is currently alone on the fence, with all 29 other recent analyst ratings being positive and naturally coalescing to a Strong Buy consensus rating. Going by the $501.15 average price target, a year from now shares will be changing hands for a ~16% premium. (See MSFT stock forecast)

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Disclaimer: The opinions expressed in this article are solely those of the featured analyst. The content is intended to be used for informational purposes only. It is very important to do your own analysis before making any investment.