Microsoft Corp (NASDAQ:MSFT)'s recent share price weakness has created an attractive risk/reward profile, analysts at Jefferies have highlighted.
The analysts believe several factors could lead to a positive re-rating for the tech giant.
They have a ‘Buy’ rating on the stock and a $550 price target, implying upside of 41% from Microsoft’s share price at the time of writing.
“Microsoft is still one of our favorite large caps despite recent underperformance,” the analysts wrote.
“Microsoft is down 9% in the last 12 months versus the iShares Expanded Tech-Software Sector ETF (IGV) 8% and hyperscaler peers 14% on average. However, we believe the recent selloff represents an attractive entry point due to derisked valuation.”
The analysts expect Microsoft’s Azure and M365 Commercial Cloud segments, which account for over half of its revenue, to stabilize and potentially accelerate as artificial intelligence revenue gains traction.
“We believe fundamentals are strong for Azure and M365 Commercial Cloud,” they wrote.
Azure continues to expand its market share, outpacing competitors like Amazon Web Services and Google Cloud in recent backlog growth.
Meanwhile, Microsoft’s AI tool, Copilot, is seeing steady adoption, with planned rollouts expected to increase significantly over the next two years.
“While still generating limited revenue today, our proprietary Copilot survey from October 2024 indicates that planned adoption remains strong despite investors' concerns,” analysts wrote.
They highlighted that, despite substantial investments in AI infrastructure, Microsoft’s operating margins are forecasted to expand further after improving by 3 percentage points in the previous fiscal year.
Additionally, there’s potential for improved free cash flow estimates as capital expenditure growth is expected to moderate, Jefferies believes.
Management anticipates that AI capacity will better align with demand by the end of the 2025 fiscal year, supporting this outlook.