Shares of Microsoft (MSFT) today closed down 13 cents, or 0.5%, at $27.87, after MKM Partners’s analyst Israel Hernandez this morning reiterated a Neutral rating on the shares and cuts his price target to $27 from $28, after cutting his estimates for the company’s Surface tablet computer and for its Windows 8 and Office productivity suite programs.
Hernandez cut his estimate for the fiscal Q3 ending this month from $20.89 billion in revenue to $20.35 billion, although he raised his EPS estimate to 76 cents from 75 cents. The Street has been modeling $20.62 billion and 74 cents.
His Q3 estimate for Surface goes to 600,000 units from a prior 800,000 units. For this year and next fiscal year, he now models the company selling 2.3 million units and 4 million, respectively, versus prior estimates for 2.9 million and 6.6 million.
Hernandez thinks despite better specs for the “Surface Pro” version of the tablet that runs on Intel‘s (INTC) chip and runs a fully-fledged version of Windows 8, he is concerned it may be a failure like Microsoft’s ill-fated “Zune” music player:
Our revised estimates reflect mounting evidence that Windows 8 is failing to resuscitate flagging PC demand, with PC shipments likely to be show double-digit declines through at least the first half of CY13. We are also lowering our forecast for Surface sales, with Surface RT on track to join Zune and the Kin in the great consumer electronics discount rack in the sky. While the prospects for Surface Pro are better, current price points on the $999+ hybrid tablet/notebook are not competitive for mass- market adoption and will need to come down, in our view, at the sacrifice of margin and further alienation of the OEM channel, which, in our view, is currently in open revolt. Four months into release, Windows 8 is dangerously close to being permanently rejected by consumers, contributing to a major headwind to the Windows and, by extension, Office businesses, which collectively account for nearly 60% of revenue and the majority of Microsoft�s profits. We are also concerned about recent reports that Microsoft is cutting Windows 8 OEM licensing fees in order to encourage OEMs to develop more touch-based form factors, a development that, if true, makes sense but will likely permanently affect Windows margins and profitability.
Hernandez also cut his full-year estimate to $78.57 billion and $2.83 per share form a prior $79.7 billion and $2.88 per share.
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