‘Hold Your Horses,’ Says Stifel on Microsoft Stock (MSFT) as All Eyes on Earnings

Market watchers are turning their attention to Wednesday, when after the closing bell, Microsoft (NASDAQ:MSFT) – along with its hyperscaler peers – will report March quarter earnings (fiscal third quarter).

While recent weeks have seen the stock pare back some losses, looking ahead to the print, Stifel analyst Brad Reback thinks the near-term set-up still remains “somewhat better” than last quarter.

For the all-important Azure, expectations for upside (39% constant currency, roughly +100 bps above the guide) are now more tempered compared to 90 days ago, and most buy-side investors have largely accepted that it will take time for M365 Copilot adoption and sentiment to meaningfully pick up.

As in the prior quarter, demand for core workloads remains solid, but internal prioritization toward first-party and R&D spending is likely capping further upside. Regarding the fourth-quarter outlook, Reback thinks investors are looking for roughly 37% cc year-over-year growth, even as Microsoft brings additional capacity online, including the Fairwater, Wisconsin site going live in April. This outlook reflects a challenging comp, given Azure accelerated by 400 basis points y/y on a cc basis in the same quarter last year, alongside ongoing internal allocation toward first-party applications and expanding LLM-related R&D.

The analyst thinks ~37% growth for Q4 also appears consistent with Azure’s historical sequential growth trends. In the prior fourth quarter, Azure revenue increased by about $2.2 billion sequentially, and adjusting for approximately 100 basis points of upside in the current quarter, a 37% growth rate would suggest around $2.5 billion in sequential revenue gains. That roughly 15% QoQ increase “seems reasonable,” balancing the impact of new capacity coming online against the continued internal allocation constraints.

“That said,” Reback added, “for sustained stock performance, we believe Microsoft needs to provide line of sight regarding when we should expect Azure growth to accelerate.”

As for capex, based on investor discussions, buy-side largely expects +$200 billion in FY27 capex, in line with the present estimate. With demand for GPUs remaining extremely strong, recent steps by Microsoft to limit some GitHub Copilot usage and sign-ups, and rising capex across hyperscaler peers, strongly suggest to Reback that the company “must sustain high levels of capex growth rates to keep pace.” The key uncertainty is how much detail management will provide on spending beyond the next quarter.   

Against that backdrop, Reback remains cautious, noting: “As highlighted in our downgrade of the stock earlier this year, we continue to believe Street revenue and EPS estimates remain too high and do not expect the stock to outperform its mega-cap AI peers until numbers bottom.”

Reflecting that view, Reback rates MSFT shares Hold (i.e., Neutral) with a $392 price target, implying ~8% downside from current levels. (To watch Reback’s track record, click here)

However, Reback is among a minority on Wall Street. Only one other analyst joins him on the sidelines, and with an additional 33 Buys, MSFT claims a Strong Buy consensus rating. The forecast calls for 12-month returns of ~33%, considering the average price target clocks in at $565.77. (See MSFT stock forecast)

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.