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The analysts’ move is based on “evidence that Azure/AWS cloud infrastructure spend is beginning to stabilize after a significant deceleration over the past year,” they wrote in an upgrade note.
“Our latest round of checks suggest the backdrop remains tough but is no longer deteriorating – the worst may be behind us. Some partners suggested new bookings discussions are slowly recovering, anecdotes that we heard in our ServiceNow checks too (an early stage loosening of IT budgets might be broader-based). Net, we raise our Azure estimates for 4Q/Jun and beyond.”
Analysts also highlight near-term AI catalysts and still-attractive valuation as key factors behind the upgrade call.
“While there is obviously a lot of AI enthusiasm already in the stock, in our view it is increasingly tough to be on the sidelines while facing two near-term AI catalysts, namely: a) the potential for the Azure revs growth rate boost from AI workloads to exceed Microsoft’s 1-point guide and/or increase in 1Q/Sept; and b) the pending M365 Copilot monetization announcement, even if we conclude that the per-seat pricing will land in the $10-15 range.”
Analysts highlight that MSFT stock is up “just” 12% since May 1 and has “materially underperformed the peer group.”
“In our view Microsoft shares deserve a higher premium given the company’s direct and material exposure to the emerging AI opportunity and the fact that CY24 might be an unusually elevated period of capex intensity, depressing FCF.”
All-in-all, the MSFT stock set-up is “too attractive to maintain a neutral view of the stock,” they added.
Microsoft shares rose 1.8% on the news.
