By Michael Elkins
BMO Capital reiterated Market Perform rating on Microsoft (NASDAQ:MSFT) and raised their price target on the stock to $325.00 (from $310.00) after conducting a survey across 100 U.S. IT decision makers around cloud services spend.
The survey responses suggest that ongoing optimization will impact cloud growth through the March quarter of 2024, and workload migrations will slow in CY23. However, analysts believe that optimization will be less of a headwind beginning in the Sept and/or Dec quarters of 2023, when Microsoft reaches an anniversary for when optimization first began to impact Azure growth.
They wrote in a note about Azure, “Our conclusion is that AI could generate about one point of upside to our FY24 Azure forecast, likely in the back half of FY24, and about three points of upside to our FY25 forecast, all else equal. In FY25, this would equate to about 1% of upside to consolidated revenues. We think broader corporate generative AI market adoption will ramp more in CY24 than in CY23, given LLM’s need to mature and improve efficacy before adoption meaningfully increases.”
They believe that this quarter will be particularly tricky as Microsoft attempts to balance near-term ongoing Azure deceleration vs longer-term Azure generative AI potential. BMO expects Microsoft to report March quarter CC Azure growth in-line with guidance of ~31% y/y CC growth. However, the analysts believe that the Azure guide will point to continued deceleration.
BMO projects 23% y/y CC growth for FY24, and believes that BMO’s FY24 estimates are below published sell-side estimates. However, they think investors are more focused on the longer-term Azure generative AI opportunities, and less concerned about potential ongoing near/medium-term deceleration in Azure results.
Shares of MSFT are down 0.14% in afternoon trading on Friday.