The Artificial Intelligence Opportunity and Recent Underperformance of Microsoft

UBS, a leading financial institution, has stated that the artificial intelligence (AI) opportunity and recent underperformance of Microsoft make it difficult to ignore. UBS analyst Karl Keirstead has upgraded the technology stock from neutral to buy and increased the price target by $55 to $400. This new target implies a potential upside of 16.7%.

Positive Outlook for Microsoft’s Cloud Infrastructure

In a note to clients, Keirstead explains the reasons behind the upgrade. He believes that the spending decline in Azure and Amazon Web Services (AWS) cloud infrastructure is stabilizing, which is a positive sign for Microsoft. This stabilization, along with upcoming AI catalysts and the significant underperformance of the stock since May 1st, make the investment opportunity too attractive to maintain a neutral view.

Improved Prospects for Azure and AI

Earlier this year, Keirstead downgraded Microsoft due to concerns about the declining trends in cloud programs like Azure. However, he now states that Azure is no longer deteriorating and may have already overcome its challenges. Keirstead has raised estimates for the cloud business, starting with the fourth fiscal quarter. He believes that AI advancements can further boost Azure’s revenue growth and exceed company guidance.

AI’s Role in Business Enhancement

Keirstead highlights the “Copilot” feature as an example of how AI can benefit Microsoft’s business. He suggests that an announcement regarding monetization of this feature could be on the horizon. Despite Microsoft’s impressive rally of nearly 43% this year, Keirstead notes that the stock’s performance since May 1st is in line with large-cap peers and even worse than the average peer’s progress during that period.

Microsoft’s Valuation and Wall Street Consensus

While Microsoft currently trades at a higher valuation compared to its broader peer group, Keirstead argues that this is justified due to the company’s exposure to AI and the potential for higher capital expenditure intensity in 2024. His upgrade aligns him with the majority on Wall Street, as over four out of every five analysts hold buy ratings on the stock, according to Refinitiv. In premarket trading, Microsoft shares rose by 1.5% following this upgrade.

Source: HaberTusba’s Michael Bloom contributed to this report.