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On Thursday, JPMorgan analyst Mark Murphy increased the price target for Microsoft (NASDAQ:MSFT) shares to $475 from $465, while reiterating an Overweight rating. The adjustment follows Microsoft’s fiscal third-quarter earnings, which surpassed expectations, especially in its Azure cloud services. According to InvestingPro data, Microsoft maintains a "GREAT" financial health score and currently trades near its Fair Value, with analyst targets ranging from $415 to $650. The company’s impressive 15% year-over-year revenue growth to $261.8 billion demonstrates its continued market strength.
The firm’s survey indicated that investor sentiment had been overly negative, a stance they have held since the beginning of the software earnings season. The survey also revealed that partners exceeded their plans and maintained strong growth expectations for Azure. Notably, Azure’s current customer consumption growth (CC) for Q3 reached 35% in constant currency (CC), exceeding both Microsoft’s guidance of 31-32% and the consensus estimate of 31%. As a prominent player in the software industry, Microsoft maintains robust profitability with a 69.4% gross margin and strong cash flows. InvestingPro subscribers can access 10+ additional exclusive insights about Microsoft’s market position and growth metrics.
Murphy highlighted the unexpected upside in Azure’s growth, particularly driven by AI demand and better execution in core compute consumption. The sequential increase in AI services’ contribution to Azure’s growth was significant, marking one of the highest based on historical data. Microsoft’s non-AI business also showed strong performance, which was unexpected based on the pre-earnings modeling.
Looking ahead, Microsoft’s guidance for Q4 suggests total revenue growth of 14% in USD or 13% in CC, which is above the consensus of 12% growth for both metrics. Azure growth is expected to be between 34-35% CC, again outpacing the consensus of 31%. However, the company anticipates some AI capacity constraints beyond June due to faster-growing demand.
The company’s capital expenditure (CapEx) for the second half of fiscal year 2025 and the outlook for fiscal year 2026 remain consistent with previous guidance. This consistency is seen as a stabilizing factor against concerns of potential changes in data center expansion plans.
In addition to Azure’s success, Microsoft reported significant traction with its Copilot and Agents products, with a notable increase in customer usage and contract renewals. The company also announced plans to expand its European data center capacity by 40% over the next two years, a move that aligns with the desire for local cloud services in Europe amidst US-Europe geopolitical tensions.
Despite encountering AI capacity constraints and some scale motion challenges, Murphy views Microsoft as poised for long-term success in various domains, including Security, Teams, Power Apps, and investments in OpenAI and ChatGPT. The limited growth in headcount also reflects a commitment to operational efficiency. Overall, the analyst’s outlook for Microsoft remains positive, with sustained share gains and the continuation of modernization and automation trends. The company’s strong financial position is reflected in its moderate debt levels and consistent dividend growth, having raised dividends for 19 consecutive years. For detailed analysis and comprehensive valuation metrics, investors can access Microsoft’s full Pro Research Report, available exclusively on InvestingPro, along with reports for 1,400+ other top US stocks.
In other recent news, Microsoft Corporation reported third-quarter results that exceeded expectations, showcasing strong performance in its cloud business, with Azure achieving a 35% year-over-year growth. This positive outcome led to analysts at Goldman Sachs and Mizuho (NYSE:MFG) Securities raising their price targets for Microsoft to $480 and $500, respectively, while maintaining favorable ratings on the stock. Goldman Sachs highlighted the acceleration of Azure’s growth and the potential for further improvements in non-AI workloads. Meanwhile, Mizuho expressed confidence in Microsoft’s medium-term revenue growth opportunities, driven by the adoption and monetization of GenAI.
Additionally, Microsoft’s performance has positively influenced other software and cloud stocks, with companies like Oracle (NYSE:ORCL) and Datadog (NASDAQ:DDOG) experiencing gains. Despite these developments, Guggenheim maintained a Neutral rating on Microsoft, noting the company’s strong position and the potential for a shift in market sentiment. Furthermore, Microsoft’s thriving cloud business continues to benefit from the growing demand for AI services, as evidenced by the increased uptake of Microsoft’s Copilot. These recent developments underscore Microsoft’s strategic positioning and ongoing investment in AI and cloud technologies.
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