Ahead of Microsoft's (NASDAQ:MSFT) upcoming 4Q earnings report, UBS analysts highlighted three main discussion points in a note Friday: Azure's potential upside from AI and core demand, capital expenditure trends, and the growth trajectory of Office 365.
The analysts maintained a Buy rating and $520 per share target on Microsoft, emphasizing that the company's involvement in AI is a major driver of its future growth.
"The read-through from the Google Cloud results was positive, as was our meeting with rival/partner CoreWeave last week. CoreWeave's revenue and backlog growth trajectory is outstanding and with Microsoft as a major customer, we view this as a positive for AI infra demand," UBS wrote.
The note highlights that investor expectations for Azure's growth appear attainable.
"Bottom line, the investor bogeys for 4Q/Jun actual c/c Azure growth of 32% and guide for 30% in 1Q/Sept seem doable," UBS stated. Additionally, the firm raised its FY25 capital expenditure estimate to $73 billion, aligning with the buy-side consensus of $70-75 billion.
On the Office 365 front, UBS sees limited upside for 4Q/Jun growth, trimming their ex-Copilot estimate due to weak seat growth signals. However, they suggest that Copilot could provide an upside surprise by 2Q/Dec 2024.
Despite recent stock fluctuations, UBS views Microsoft's valuation as justified. "The stock isn't cheap at 38x CY25 FCF but, in our view, is justified by 15%+ EPS growth in FY25 and a compelling AI story that has barely played out," UBS added.
The investment bank underscored the significance of Microsoft's leverage in the AI sector, projecting robust EPS growth and maintaining a price target of $520 based on a CY25 FCF multiple of 47x.
In conclusion, UBS remains bullish on Microsoft, driven by its promising AI prospects and strong fundamentals despite the high valuation and tight IT budget backdrop.