Proactive Investors - Analysts at UBS have upgraded their rating on Microsoft Corporation (NASDAQ:MSFT) stock to ‘Buy’ from ‘Neutral’ and increased their price target on the stock citing the stabilization of the company’s cloud unit and upcoming artificial intelligence (AI) catalysts.
The analysts raised their price target to US$400 from US$345. Microsoft shares traded around 1.9% higher on Friday morning at $349.
In a note to clients, they wrote that there was evidence that Microsoft’s Azure and Amazon (NASDAQ:AMZN) Web Services (AWS) cloud infrastructure spending was beginning to stabilize after a significant deceleration over the past year.
“We downgraded Microsoft shares to start the year on a view that spending trends on Azure/AWS were deteriorating and that a faster-than-expected Azure deceleration would hold back the stock (it obviously didn’t),” they wrote.
“Our latest round of checks suggests the backdrop remains tough but is no longer deteriorating - the worst may be behind us.”
They also noted two near-term AI catalysts for Microsoft stock, the first being the potential for Azure's revenue growth boost from AI workloads to exceed Microsoft’s 1-point guide and/or increase in the first quarter/September.
As well, the analysts pointed to the pending M365 Copilot monetization announcement, while they concluded that the per-seat pricing will land in the $10 to $15 range.
“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,” they wrote.
On their updated valuation the USB analysts wrote: “We believe this [stabilizing cloud spend] coupled with near-term AI catalysts as well as the material underperformance in the stock since May 1st make the setup too attractive to maintain a neutral view of the stock.”
Since May 1st, Microsoft shares have added 12%, materially underperforming their large-cap peers, the analysts wrote.
“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 the 2024 calendar year might be an unusually elevated period of capex intensity, depressing free cash flow.”