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Investing.com -- Bank of America reiterated a Buy rating on Microsoft (NASDAQ:MSFT) in a Tuesday note, stressing that the tech behemoth is "still best positioned for AI cycle.”
To reflect the current macro uncertainty, the bank reduced its price target on Microsoft shares to $480 from $510.
According to BofA, Microsoft’s third-quarter fiscal year 2024 (Q3FY24) deal activity was generally in line with expectations, mirroring the previous quarter’s performance. The Wall Street firm expects Q3FY24 revenue to align with its estimate of $68.2 billion, representing a 10.3% year-over-year increase.
The weaker U.S. dollar is projected to have a negative impact of 100 basis points on year-over-year growth, an improvement from the previously guided 200 basis points.
In the cloud segment, Azure’s growth is predicted to meet BofA’s projections, with a 31.5% year-over-year constant currency growth, 14 percentage points of which are attributed to AI.
“In Azure, partners generally pointed to stable activity with hybrid cloud (Azure Arc) and app modernization projects driving the most consumption,” analysts Brad Sills and Carly Liu wrote in the note.
Microsoft’s data analytics offering, Fabric, is reportedly gaining momentum as companies move data to the cloud to leverage AI technologies.
The Productivity and Business Processes (PBP) segment is also expected to perform in line with BofA’s forecast of $29.53 billion, assuming a 15% constant currency growth in Office Commercial revenue.
Despite no significant signs of slowing consumption or pipeline growth, BofA has adjusted its Q4 Azure growth estimate to 30.5% in constant currency, down from 31.5%, due to potential macroeconomic headwinds.
Moreover, while there have been rumors of Microsoft reducing its capital expenditures (capex), the analysts believe the company is strategically reallocating capex geographically and remains committed to long-term capacity building, with capex estimates of $87 billion for FY25 and $97 billion for FY26.
BofA’s new price objective of $480 reflects a 36x multiple on the estimated FY26 free cash flow, a slight decrease from the previous 38x multiple.
The bank emphasizes Microsoft’s advantageous position in the AI cycle across applications and infrastructure, justifying a premium valuation compared to the Growth at a Reasonable Price (GARP) group.