Here's Why Microsoft Corporation Shares Might Underperform

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While Fools should generally take the opinion of Wall Street with a grain of salt, it's not a bad idea to take a look at particularly stock-shaking analyst upgrades and downgrades -- just in case their reasoning behind the call makes sense.

What: Shares of Microsoft  traded sluggishly on Monday after Deutsche Bank downgraded the software behemoth from buy to hold.

So what: Along with the downgrade, analyst Karl Keirstead planted a price target of $42 on the stock, representing just 7% worth of upside to yesterday's close. So while momentum traders might be attracted to Microsoft's price strength over the past year, Keirstead's call could reflect a growing sense on Wall Street that its valuation is becoming a bit stretched.

Now what: According to Deutsche, Microsoft's risk/reward trade-off is pretty balanced at this point. "At the time that we assumed coverage of MSFT shares in January 2014, our bullish call was rooted in a number of pending catalysts, including the CEO change, the likelihood of a big Xbox One print, a stabilizing PC market with better-than-expected business PC sales, share gains in enterprise software and our belief that Street sentiment toward the megacap incumbents (MSFT& ORCL) was too negative relative to the high-growth disruptors," said Keirstead. "Many of these catalysts have now played out, and the nearest-term event (closing of the NOK deal) may be a net negative." With Microsoft shares still trading at a reasonable forward P/E of 13, however, long-term shareholders might do well to take Deutsche's downgrade with a grain of salt. 

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Brian Pacampara has no position in any stocks mentioned. The Motley Fool owns shares of Microsoft. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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