Microsoft Corp (NASDAQ:MSFT)’s setup heading into its fiscal third-quarter earnings report due after markets close on Wednesday looks “derisked,” with Jefferies analysts citing attractive valuation and resilient IT spending trends despite macro uncertainty.
Analysts noted Microsoft’s valuation multiple has compressed by 13% since its last earnings print, creating a more favorable backdrop.
Jefferies sees Microsoft’s third-quarter growth targets as achievable, helped by favorable comparisons and currency benefits, but expects cautious fourth-quarter guidance despite signs of resilient IT spending from early earnings reports at ServiceNow, SAP, and Alphabet.
Analysts expect Microsoft to meet third-quarter expectations but offer cautious fourth-quarter guidance due to tariff risks. “Focus will be on the level of conservatism embedded in the guide given tariff uncertainty,” analysts wrote.
Growth in Azure will be critical. Consensus estimates of 31.5% year-over-year growth in constant currency are “reasonable,” Jefferies said, though real upside must come from core cloud services. “While AI contribution with hype around the influx of ChatGPT workloads can potentially drive outperformance, given capacity constraints, we believe the upside will need to come from core Azure.”
Jefferies expects Microsoft's productivity software growth targets of 12.5% year-over-year in the fourth quarter to be achievable, driven in part by contributions from its Copilot AI tools.
Broader tech resilience is another positive. “Prints from ServiceNow, SAP and Alphabet indicate resilient Q1 spend... MSFT is better insulated than most due to the stickiness of its business,” Jefferies wrote.
Jefferies expects capital expenditures to moderate and foreign exchange effects to turn into a “modest tailwind.” Margins are also forecast to expand slightly in fiscal 2025.
Microsoft shares traded down 1% at about $390 late morning on Wednesday.
- Updated with share price movement -