‘There’s Nothing Wrong,’ Says 5-Star Analyst About Microsoft Stock (MSFT)

Microsoft (NASDAQ:MSFT) shares are still down about 19% year-to-date, even after a recent rebound, as investors continue to question whether the company’s heavy CapEx spending is translating into meaningful revenue growth. The concern is that, despite aggressive investment in AI and infrastructure, the payoff may take longer to materialize than many had anticipated.

Yet, not everyone is convinced there’s a problem. Bernstein analyst Mark Moerdler pushes back on the bearish view, saying he does not believe there is “anything fundamentally wrong” with the story.

“Instead,” the 5-star analyst said, “we believe MSFT is doing the right things for value creation and Azure growth will in fact inflect up in Q3/Q4, which should allay much of the fears.”

While Moerdler says investors’ concerns are understandable, the analyst thinks they are overstated and that greater clarity on the CAPEX issue should emerge soon, and in a way that will “make investors feel much better about the stock.”

Management has indicated that constrained capacity, particularly in powered-up datacenter infrastructure, is driving allocation decisions. The company is prioritizing incremental capacity across R&D, first-party apps such as Copilots, and Azure; however, Moerdler concedes that “those comments alone have not built confidence.”

The key underlying question is where CAPEX is being deployed and when it will begin generating meaningful revenue. Moerdler believes Microsoft is directing an increasing share of new capacity toward first-party applications, with this likely to rise further as Office 365 E7 increases usage, as well as toward internal development, including the construction of proprietary models. However, the primary driver, he believes, is that a substantial portion of CAPEX is currently being used to build out and retrofit datacenters and to install server infrastructure within them, which has not yet begun contributing to revenue generation.

“In other words,” says Moerdler, “there is a capacity backlog that is being built that will go online shortly, allowing Microsoft to meet more of their Azure demand and in turn accelerate Azure growth.”

Additionally, Moerdler notes that SaaS AI and Copilot offerings are not pressuring gross margins, while R&D spending on model development has not led to an increase in R&D as a percentage of revenue. As a result, although these areas warrant ongoing monitoring, the company is “executing well and being good stewards of the business and the CAPEX investments.”

Bottom line, Moerdler thinks the company is in rude health, and the stock offers a real opportunity right now. “This is one of our favorite names given AI concerns are overblown, the easy valuation, and the quality of the business,” the analyst summed up.

All told, Moerdler assigns MSFT an Outperform rating, backed by a $641 price target, implying the stock will gain ~64% over the one-year timeframe. (To watch Moerdler’s track record, click here)

Overall, with just 3 analysts on the sidelines and 34 firmly in the bullish camp, Wall Street’s conviction is hard to ignore, earning the stock a Strong Buy consensus. And the optimism doesn’t stop there – the $574.62 average price target points to a ~47% upside over the next 12 months. (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.