Microsoft (NASDAQ:MSFT) is a company at the forefront of the AI boom, using its tech stack and its OpenAI partnership to deliver a complete AI platform for businesses and consumers. And when you factor in its suite of top cloud applications, Baird analyst William Power thinks the company is well-positioned to keep on delivering the goods.
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“While the stock has performed well YTD, it is off its recent highs on AI capex and cycle concerns, and we like the near- and long-term position,” Power, who ranks among the top 4% of Street stock experts, went on to say.
Power identifies several positives in the MSFT story. The company is delivering “strong overall growth at scale,” with FQ1 revenue up 18% to $77.7 billion, driven by Azure and the Intelligent Cloud business. Azure stood out the most, rising 40% in the quarter (39% in constant currency) and leading the hyperscalers. Microsoft’s total cloud revenue rose 25% cc and now accounts for roughly 60% of overall sales. Meanwhile, its OpenAI partnership is a “differentiator” that continues to boost both its infrastructure and applications, helping it run AI services at “scale and speed.” Copilot was another key performance driver in the quarter, surpassing 150 million MAUs (monthly active users). The core applications performed well too, with the Productivity and Business Processes division – which includes Microsoft 365, LinkedIn, and Dynamics – growing 17%. Power also points to the company’s “strong profitability” and cash flow, noting its 49% operating margin and 33% FCF margin, which help drive continued EPS growth in the mid-teens or better.
That said, there are some less appealing aspects worth keeping an eye on. These include the ongoing capex ramp. Power expects capex (including finance leases), to rise from $88 billion in F25 to $143 billion in F26, though the analyst still calls for a solid $74 billion of FCF in F26. “With Azure demand still outstripping supply, capex could continue to rise, both an opportunity and risk,” the 5-star analyst explained.
There are also questions around AI-related market speculation, but it’s hard to pinpoint the timing of any potential bubble, and current valuations for MSFT and the hyperscalers don’t look stretched relative to their growth outlook.
Another unknown is whether Microsoft can maintain leadership in both infrastructure and applications. While Power expects other application winners will emerge, he believes the “end-to-end platform is well positioned.”
However, these concerns are not big enough to override a bullish stance. “While admittedly taking the consensus view, we expect strong double-digit growth coupled with impressive margins to still stack up well relative to the broader market,” Power summed up. “We view MSFT as a core long-term AI holding, benefiting from its infrastructure, data layer and applications.”
To this end, Power initiated coverage of MSFT stock with an Outperform (i.e., Buy) rating and $600 price target, suggesting the shares will climb 18% higher in the months ahead. (To watch Power’s track record, click here)
There’s full agreement on Wall Street that this is a stock to own. Based on a unanimous 34 Buys, MSFT naturally claims a Strong Buy consensus rating. Going by the $633.14 average price target, a year from now, investors will be pocketing returns of 24%. (See MSFT stock forecast)
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Disclaimer: The opinions expressed in this article are solely those of the featured analyst. The content is intended to be used for informational purposes only. It is very important to do your own analysis before making any investment.