Microsoft (MSFT) outages and “blue screen of death” had some folks around the world hitting the panic button as IT specialists scrambled to solve the perplexing technical issues. Microsoft stock took a bit of a hit on the day as investors sold first with the intent of asking questions later. In any case, the outages have since been solved, and with MSFT stock almost in correction territory, perhaps growth-focused investors should forgive the hiccup (which I view mostly as noise) and look to buy the analyst-loved name on weakness as its AI momentum is showing no signs of slowing. All considered, I’m staying bullish on the name after its recent modest pullback.
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Undoubtedly, whenever there’s such a widespread outage like the one that hit Friday morning, the first thing that comes to mind is a cyberattack. Fortunately, the sweeping outages were not due to a hack but a bad software update from cybersecurity firm CrowdStrike (CRWD). To say the update did not “play well” with the Windows operating system would be a colossal understatement.
Either way, it was an embarrassing and historic technical error for the massive cybersecurity heavyweight — one that forced CEO George Kurtz to apologize to the public on national television for the inconvenience.
Microsoft Faces Choppiness After Outage Rocks Windows Users
After investors discovered that CrowdStrike and not Microsoft were to blame, MSFT shares steadily recovered right into the close, ending the day down just shy of 0.7%, pretty much in line with the S&P 500’s losses for the day. The big breath of relief for MSFT shareholders is nearly palpable, especially given that the company was hit with a Russian hack earlier this year.
For a firm that has its own cybersecurity service, the January breach acted as a huge reputational gut punch. Cyberattacks and other wide-reaching technical mishaps can happen to anyone, including the second-largest company on the earth. In any case, the big question is whether the latest CrowdStrike outages will negatively impact Windows users’ perception of Microsoft.
In contrast to the outage faced by Microsoft Windows, we didn’t see Apple (AAPL) macOS going down during the CrowdStrike blunder! Apple’s operating system is more tightly integrated with its hardware and software compared to MSFT’s Windows ecosystem. This gives Apple better control over updates. Additionally, with such a privacy focus (paramount in the artificial intelligence (AI) age), perhaps fed-up Windows users may be inclined to make the jump into Apple’s walled garden in the future. That said, switching costs seem too high to justify such a shift over one incident.
As outage concerns become old news and Microsoft continues innovating on the AI front, perhaps investors may have a shot to score a reasonable price of admission into the enterprise behemoth, with the stock now trading at 32.8 times forward price-to-earnings.
While still at the high end of the past year’s range, MSFT is really applying the gas to its Azure cloud business, which could sustain its 30% growth rate some time. In the most recent quarter (Q3 of Fiscal 2024), Azure clocked in 31% in top-line growth. This impressive momentum has AI written all over it.
MSFT’s AI Focus is Paying Off
According to Jeremy Goldman, a senior director at Emarketer, Microsoft’s prior “doubling down on innovation” is “paying off” in the form of “AI-powered earnings.” He’s right on the money. In fact, I’d argue that the best has yet to come as AI helps propel Azure higher in the cloud than top rival Amazon (AMZN) Web Services (AWS).
According to Morgan Stanley (MS), Azure growth is expected to “modestly accelerate” as it sprints into the results for the fourth and final quarter of the year, scheduled to release on July 30, 2024.
A modest acceleration could be followed by a significant one, as IT budgets have room to expand. Further, Microsoft has plans to almost double its AI capital expenditures to $63 billion by Fiscal 2025, up from $32 billion in 2023.
That’s a heftier bill for such AI R&D. But for a company already witnessing a massive payoff, I’d argue it only makes sense to hit that accelerator to pull ahead of rivals in the cloud and on device. Reportedly, a big chunk of the upped AI spend will go to Azure AI Services and Copilot.
Sure, Meta Platforms (META) may have also taken its AI spending into overdrive. Still, comparatively, I’d be willing to bet Microsoft will score a much better return on its investment than Meta. Not just because the payoff has already worked its way into the books but also due to the firm’s virtually unmatched AI talent, which is perhaps only second to OpenAI, a firm Microsoft already has a deep relationship with.
Is MSFT Stock a Buy, According to Analysts?
On TipRanks, MSFT stock is a Strong Buy. Out of 35 analyst ratings, there are 34 Buys and one Hold recommendation. The average MSFT stock price target is $504.12, implying an upside potential of 13.8%. Analyst price targets range from a low of $465 per share to a high of $600 per share.
The Bottom Line on Microsoft
The pullback in Microsoft stock, slightly worsened by last week’s widespread Windows outage, seems like a fantastic buying opportunity for investors seeking to bet on AI at a slight discount. Of course, the near-term correction could extend in the coming weeks as the technology sector keeps rolling over.
Either way, Microsoft has an AI plan that works and is doubling down on it. Moving ahead, look for Azure growth to stay strong as the enterprise behemoth continues to gain traction, proving it’s one of the leaders in the AI race.
