Analysts See Microsoft's Stock Sell-off as a Buying Opportunity

Several analysts are advising investors to consider buying Microsoft Corp. shares on any further dips following recent declines in premarket trading.

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Shares of Microsoft, symbol MSFT, fell 5.63% in after-hours trading due to a revenue outlook that fell short of expectations and guidance indicating a slowdown in Azure’s cloud-computing growth for the current quarter. As Microsoft’s stock dropped by more than 3% in Thursday’s premarket, analysts stepped in to address investor concerns from the previous day’s earnings report.

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Evercore ISI analyst Kirk Materne pointed out that part of Microsoft’s lower guidance is due to some AI capacity adjustments moving to the second half of the fiscal year, while Azure’s demand is expected to stay consistent between the first and second quarters. He also noted that Microsoft anticipates Azure’s growth will pick up again in the fiscal year’s latter half. Materne views the current dip in share prices as an opportunity, considering that Microsoft’s AI products are likely to achieve a $10 billion annualized revenue rate this quarter, with more capacity coming online next year.

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“Long-term trends in Microsoft’s commercial business remain strong,” Materne explained, adding that the company continues to expand its market share in cloud services as its AI solutions scale. He maintained his “outperform” rating on Microsoft and kept his price target at $500, underscoring his belief in the company’s potential for steady growth in revenue and profits.

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Ben Reitzes from Melius Research sees a “bit of confusion” around Microsoft’s revenue shortfall, which was approximately $1.3 billion below analysts’ estimates. He attributes this discrepancy to changes in Microsoft’s gaming revenue accounting and Azure’s temporary capacity constraints. Reitzes noted that this confusion presents an opportunity, predicting that Azure will likely benefit in the second half of the fiscal year from Nvidia’s upcoming Blackwell chips and increased capacity. He also expects OpenAI to drive more cloud usage.

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Reitzes highlighted some debate over how to account for OpenAI’s losses, which may be non-cash and therefore less concerning to Wall Street analysts. Maintaining a “buy” rating on Microsoft, Reitzes has a target price of $480 for the stock, pointing out that these losses won’t impact metrics like earnings before interest, taxes, depreciation, and amortization (EBITDA).

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Meanwhile, Bernstein’s Mark Moerdler acknowledged some lingering questions about Microsoft’s future, specifically around the effectiveness of its Copilot AI assistant and how the company plans to monetize its significant AI investments. Despite these uncertainties, Moerdler is optimistic, suggesting that once Microsoft expands its cloud capacity, investors will gain more confidence in the consistency of its AI revenue. “Overall, the investment thesis remains solid,” he noted, adding that Microsoft’s recent dip, coupled with reduced competition in the stock, makes it a more appealing option. Moerdler raised his target price from $500 to $511 and reiterated his “outperform” rating.

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However, Guggenheim’s John DiFucci took a more cautious approach, questioning whether Microsoft’s AI monetization strategy will yield the expected returns in its Office suite. DiFucci compared waiting for this AI-driven revenue to waiting for Godot, noting that while some investors anticipated a substantial revenue boost from Copilot’s release on November 1, 2023, there has been minimal noticeable impact on Microsoft’s M365 Commercial Cloud business one year later. He maintains a neutral rating on Microsoft, expressing skepticism about whether AI will contribute significantly to its growth in the near term.

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These differing perspectives reflect broader sentiment on Microsoft’s AI and cloud strategies. While some analysts remain bullish on its long-term growth potential, particularly in AI, others are cautious about the challenges in quickly monetizing these innovations.

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