UBS maintains Buy rating, $510 target on Microsoft stock

On Monday, UBS analyst Karl Kierstead reiterated a Buy rating on Microsoft (NASDAQ:MSFT) with a price target of $510.00. According to InvestingPro data, Microsoft currently trades at $384.53, near its 52-week low, with a P/E ratio of 31x. The stock’s current valuation appears slightly below its InvestingPro Fair Value, suggesting potential upside opportunity. Kierstead’s commentary focused on the recent performance dip in Microsoft shares, which he attributed to a slowdown in Azure’s growth without AI, dropping to 18% from 24% in the span of two quarters. He pointed out that Microsoft has acknowledged the effect of go-to-market (GTM) changes planned for mid-2024, but the lack of clarity around the root cause and the timeframe for resolution is affecting investor sentiment. Despite these concerns, Microsoft maintains strong fundamentals with 15% revenue growth and an impressive market capitalization of $2.86 trillion. Want deeper insights? InvestingPro offers 15+ additional exclusive tips about Microsoft’s performance and outlook.

Kierstead and his team reached out to several Microsoft channel partners to gain insight into the GTM changes and their impact on Azure’s core growth. The partners’ feedback was detailed in UBS’s note, suggesting that the GTM adjustments around licensing, channel incentives, and account management could have contributed to the Azure sales deceleration in the second quarter of December.

Despite the current challenges, UBS believes that Azure’s medium-term prospects remain strong. They suggest, however, that investors may have the opportunity to remain patient in the near term while Microsoft addresses the GTM disruptions. The analyst’s checks confirmed that Microsoft implemented significant GTM changes in mid-2024, which included moving accounts from Enterprise Agreements to Cloud Solution Provider contracts. These changes, while potentially causing short-term disruptions, are seen as a legitimate explanation for the recent Azure performance and may take several quarters to fully resolve. Notably, Microsoft maintains a strong analyst consensus rating of 1.4 (Strong Buy), with 19 analysts recently revising their earnings estimates upward. For comprehensive analysis including detailed financial health metrics and expert insights, check out the full Microsoft research report on InvestingPro.

In other recent news, Microsoft has disclosed that it is generating over $13 billion in annualized AI revenue, up from $10 billion just three months earlier. This growth is primarily driven by Microsoft’s Azure cloud computing unit and OpenAI-powered Office 365 products. Additionally, Microsoft plans to invest approximately $300 million in AI infrastructure in South Africa, as announced by Brad Smith, the company’s Vice Chair and President. In a move to enhance its AI capabilities, Microsoft is working towards AI self-sufficiency, with its in-house team developing new models that could rival those from OpenAI and Anthropic.

Meanwhile, Stifel analysts have reduced their price target for Microsoft to $475 from $515, while maintaining a Buy rating. This adjustment follows discussions with Microsoft’s Investor Relations Team, highlighting a shift in focus from generative AI potential to the company’s ability to translate capital expenditures into revenue growth. The analysts noted Microsoft’s substantial increase in capital expenditures for fiscal year 2025, with expectations of continued growth. Despite this, they anticipate Microsoft will achieve double-digit revenue and profitability growth, driven by the emerging generative AI cycle.

In other developments, Microsoft is testing models from OpenAI’s competitors, such as Anthropic and Meta Platforms (NASDAQ:META), for its AI tools like Copilot. These efforts are part of Microsoft’s strategy to reduce reliance on OpenAI’s technology and enhance its own AI offerings. Under Mustafa Suleyman’s leadership, the company is exploring the release of its internally developed MAI models, which have shown promising performance in internal benchmarks. However, the success of these efforts remains to be seen as Microsoft continues to balance partnerships and internal development in its AI strategy.

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