Investing.com -- Cantor Fitzgerald has initiated coverage on Microsoft (NASDAQ:MSFT) stock with an Overweight rating and a price target of $509, signaling roughly 20% upside from the last closing price.
The firm's optimism is fueled by the robust performance of Microsoft's Intelligent Cloud division, which is expected to grow its revenue share from 35% in fiscal year 2023 to 41% by fiscal year 2026 (FY26). This growth is largely attributed to the company's Azure cloud platform, which comprises 58% of the Intelligent Cloud's revenue for FY23 and is projected to increase to 76% by FY26.
Cantor analysts highlighted the triple-digit growth in AI-related revenues from Azure and anticipate this strong growth to persist in the near term.
Moreover, positive feedback from industry checks, citing Microsoft's extensive infrastructure and platform offerings, was highlighted. The ability to bundle cloud-related products with other services like security and Teams was also seen as a positive driver.
On the other hand, the sentiment on Microsoft's Copilot was mixed, with GitHub Copilots receiving favorable reviews, but less enthusiasm shown for M365. Still, the expectation is that trials will continue with confidence in product improvements.
Cantor Fitzgerald believes the ongoing debate regarding capital expenditures (capex) and return on investment (ROI) leans in favor of Microsoft. This is due to potential long-term reductions in compute and infrastructure costs and a focus on inference-related core AI, which could drive recurring and sustainably growing revenue streams.
The firm identified several potential catalysts for Microsoft's stock, including easing supply constraints in the second half of fiscal year 2025, which could accelerate AI-related revenue growth.
Also, any further details provided on the success of Copilot could significantly enhance the perceived opportunity and lead to positive financial revisions.
Moreover, analysts note that the lower capital expenditure (capex) “could create volatility around MSFT shares, but likely a lower move at first given the correlation made by management related to bookings growth and capex.”
“We would view this as a buying opportunity provided our view the company is more geared to inference-related, recurring AI workflows and, of course, Copilot, where the lower capex could translate into positive FCF revisions and a snap back in shares," they added.
Key investment considerations outlined by Cantor Fitzgerald include the timing and scale of a slowdown in capex spending. Microsoft's CEO recently discussed a capex investment of about $80 billion, which aligns with previous estimates for the calendar year 2025.
“Microsoft has been very clear and consistent that they are spending against bookings now and that leverage will follow with slowdown in capex and recurring AI revenues remaining in future periods,” analysts continued.
Other important investment considerations include the nature of AI revenues, Copilot revenues, and Microsoft’s relationship with OpenAI.