TLDR
- Bernstein reiterates Outperform rating and $641 price target on Microsoft (MSFT)
- MSFT is down 27.5% over the past six months, currently trading near its 52-week low at $370.87
- Bernstein says Azure margin pressure is temporary and tied to a timing gap between AI spending and revenue
- Azure growth expected to accelerate in Q3 and remain strong into Q4
- Wall Street holds a Strong Buy consensus on MSFT, with an average price target of $581.61
Microsoft has taken a beating over the past six months, dropping 27.5% to $370.87. That’s close to its 52-week low. But Bernstein isn’t backing down from its bullish stance.
Analyst Mark Moerdler reiterated an Outperform rating and a $641 price target on MSFT — more than 70% above where the stock trades today.
The core of Bernstein’s argument is timing. Microsoft is pouring money into AI infrastructure, and that has rattled some investors. But Moerdler says the spending is not the problem people think it is.
The firm’s view is that most of this capital is being deployed into capacity that starts generating revenue within six months of being spent. The lag between spending and payoff is making the numbers look worse than they are right now.
Bernstein examined five ways Microsoft could be allocating its capital expenditures: first-party apps, free Copilot usage, internal use, lower-margin Azure AI revenue, and capacity not yet online. The firm found the mix more favorable than the market seems to appreciate.
A big chunk of the investment is going into higher-margin areas, particularly Microsoft’s own software and AI tools. Copilot, for example, is delivering SaaS-style AI revenue with solid margins following the shift to paid subscriptions.
Azure Margins Under Pressure — But Not Forever
Azure margins have been sliding, and Bernstein acknowledges that. The reason, the firm says, is that early-stage AI workloads carry lower margins than traditional cloud services.
As those workloads mature and scale, Bernstein expects the margin profile to improve. The pressure is a function of where Azure is in its AI growth cycle, not a structural problem.
Research and development spending, as a percentage of revenue, has stayed relatively flat. That’s a point Bernstein uses to argue Microsoft isn’t burning money without discipline.
Microsoft posted 16.7% revenue growth over the last twelve months. The stock’s P/E sits at 23.26, with a PEG ratio of 0.8 — a level that Bernstein and InvestingPro both flag as undervalued at current prices.
Azure Growth Expected to Pick Up in Second Half
Bernstein is forecasting Azure growth to accelerate in Q3, with momentum holding into Q4. That outlook is tied directly to the capacity Microsoft has already paid for coming online.
Microsoft also has a separate project underway — developing large-scale in-house AI models by 2027 as alternatives to tools from OpenAI and Anthropic.
UBS recently reiterated a Buy on Chevron following a power generation deal with Microsoft. The two companies are building natural gas plants in Texas to supply electricity directly to Microsoft’s AI data centers.
On the broader analyst front, 34 out of 37 Wall Street analysts who rated MSFT in the past three months gave it a Buy. The average price target sits at $581.61, implying 56% upside from current levels.
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