Microsoft (NASDAQ:MSFT) stock might finally be turning a corner after a rough period. Concerns that AI could undermine traditional software, along with unease over surging CapEx and a heavy reliance on the loss-making OpenAI for a sizable share of its backlog, drove shares down by more than 30%. The stock has since rallied ~18% from its late-March lows, hinting a floor may be forming, though it still sits 13% lower for the year.
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Against this backdrop, with the tech giant due to report FQ3 (March quarter) results on April 29, 5-star Baird analyst William Power thinks the setup is appealing.
Although Microsoft is exposed to risks in parts of its app portfolio, Power thinks its broad global footprint, strong enterprise ties, and “deep integrations” give it a relative edge over many other established SaaS players.
“While we understand investors’ frustrations pertaining to arguably slower pace of innovation vs. the AI Labs (particularly Anthropic), MSFT also continues to innovate and enterprise reach is a key advantage,” the 5-star analyst went on to say.
Power notes that investors remain uncertain about Copilot’s positioning amid “accelerating innovation” from Anthropic’s Claude and OpenAI’s ChatGPT. While this creates some risk, Copilot benefits from deep integration within the M365 suite and Microsoft’s strong enterprise reach. Moreover, Judson Althoff, CEO of MSFT Commercial, noted earlier this month that Copilot achieved its ambitious FQ3 targets.
Meanwhile, Azure remains a “key growth pillar,” with Power expecting FQ3 growth at 39% (37% ex-FX), in line with the guide. Demand continues to exceed available supply, an issue seen across the industry, which is likely driving ongoing increases in capital expenditures but Power views that “as a good problem to have.” However, supply constraints and internal investment priorities might limit Azure’s ability to reaccelerate growth this quarter, although expanding data center capacity could “unlock higher growth exiting this year.”
As for the raw results, Power expects a “solid quarter overall.” The analyst anticipates total revenue of $81.2 billion, representing 15.9% year-over-year growth and broadly in line with the guide, with the potential for modest upside similar to recent quarters. Guidance includes an approximately 3% y/y FX tailwind, though FX could ultimately contribute 300–350bps in FQ3, implying slight upside to reported figures. Power forecasts Microsoft Cloud gross margins at 65% (down from 67% in FQ2) and GAAP operating margins at 45.1%, resulting in adjusted EPS of $4.06, roughly in line with consensus.
So, what does this ultimately all mean for investors? Power assigns MSFT shares an Outperform (i.e., Buy) rating, although his price target goes from $540 to $500, now suggesting the stock will gain 19% over the one-year timeframe. (To watch Power’s track record, click here)
34 other analysts join Power in the bull camp, while 3 additional Holds can’t detract from a Strong Buy consensus rating. Going by the $571.29 average price target, a year from now, the shares will be changing hands for a ~36% premium. (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.