Microsoft Shares Get a Price Target Boost Ahead of Earnings, Fueled by Azure and AI Growth
Microsoft Corp. (MSFT) shares received a significant price target bump from Piper Sandler analyst Brent Bracelin, just a week before the software giant is set to release its quarterly earnings. Bracelin reaffirmed his "Overweight" rating on Microsoft shares and raised the price target from $465 to $485, implying a potential 10% upside for the stock. This bullish outlook is driven by the analyst’s belief that Microsoft’s cloud business, particularly its Azure platform, is poised for continued strong growth, propelled by artificial intelligence (AI) adoption.
Key Takeaways:
- Azure Growth: Bracelin expects Azure revenue to grow by 32% on a constant currency basis in the June quarter, exceeding the 30-31% guidance. AI is expected to contribute at least 7 percentage points to this growth.
- AI-Driven Cloud Expansion: The analyst highlights that Microsoft’s AI strategy is heavily focused on Infrastructure as a Service (IaaS) rather than Software as a Service (SaaS), with a 95% to 5% split. This indicates a significant emphasis on supporting AI workloads through Azure’s infrastructure.
- Increased Capex Investment: Microsoft’s significant investments in data centers, reflected in high capex and lease expenses, are expected to continue, fueled by the company’s commitment to scaling its cloud infrastructure for AI-driven growth.
- Sustained Double-Digit Growth: Bracelin suggests that Microsoft’s cloud transformation and AI advancements could drive double-digit top and bottom-line growth through 2030, encouraging investors to look beyond near-term concerns about potential AI overbuild.
- Earnings Expectations: Analysts anticipate Microsoft to report earnings per share of $2.93 and revenue of $64.35 billion for the fiscal year 2024 fourth quarter. This represents a significant increase from the year-ago earnings of $2.69 per share and revenue of $56.19 billion.
Microsoft’s Cloud Strategy: A Core Driver of Growth
The analyst’s optimism stems from his view that Microsoft’s cloud business is undergoing a major transformation, fueled by the rapid adoption of AI. While Microsoft took 13 years to reach a $100 billion annual revenue run-rate for its cloud services business, Bracelin believes that the next $100 billion could be achieved in just three years. This accelerated growth trajectory is attributed to the significant investments Microsoft is making in data center infrastructure to support the rapidly expanding needs of AI workloads.
He anticipates that Azure, the cornerstone of Microsoft’s cloud strategy, will reach a run-rate of $85 billion, with growth exceeding 30%. This strong performance is driven by the increasing adoption of AI across industries, with Azure playing a key role in providing the infrastructure and platform for AI development and deployment.
AI Integration: A Differentiator for Microsoft’s Cloud Strategy
Microsoft’s AI strategy is unique in its heavy emphasis on IaaS rather than SaaS. This approach suggests that the company focuses on providing the fundamental infrastructure for AI workloads, rather than solely developing AI-powered applications.
Bracelin points out that 95% of Microsoft’s AI offerings currently reside in IaaS, with only 5% in SaaS. This signifies Microsoft’s ambition to position Azure as the preferred infrastructure platform for AI development and execution, providing the necessary compute power, storage, and networking capabilities for AI applications.
Microsoft’s Investment in the Future: High Capex and a Commitment to AI
Microsoft’s commitment to AI and cloud growth is reflected in its continued high investments in capex and lease expenses. The analyst forecasts that these expenses will surpass $19 billion in the June quarter, demonstrating the company’s dedication to building and expanding its data center infrastructure to meet the demands of AI workloads.
This strategy highlights Microsoft’s proactive approach to staying ahead of the AI curve, ensuring that Azure has the capacity to handle the increasing volume of data processing and model training associated with AI applications.
The Bigger Picture: Growth Beyond AI Overbuild Concerns
While some analysts express concerns about potential overbuild in the AI market, Bracelin remains confident in Microsoft’s ability to sustain growth in the long term. He believes that the company’s cloud transformation and AI strategy will drive double-digit growth through 2030, transcending the short-term concerns about AI overbuild.
The analyst emphasizes the importance of looking beyond the immediate concerns and focusing on the larger picture of cloud transformation and AI adoption. He argues that Microsoft is well-positioned to benefit from the continued growth of these trends, making it a compelling investment opportunity.
Conclusion: A Positive Outlook for Microsoft
Overall, Bracelin’s bullish outlook on Microsoft’s stock is driven by the company’s strong position in the cloud market, particularly its focus on AI through Azure. Despite potential concerns about AI overbuild, the analyst believes that Microsoft’s long-term strategy will fuel sustained growth, making it an attractive investment opportunity. Investors will be keenly watching Microsoft’s upcoming earnings release, hoping for further confirmation of the company’s strong performance and commitment to its AI-driven cloud vision.
