Microsoft Corp (NASDAQ:MSFT) is set to report fiscal fourth quarter results this week, with UBS maintaining its ‘Buy’ rating while taking a more balanced tactical stance ahead of the release, citing expectations for higher capital spending alongside steady cloud demand.
Following recent conversations with Microsoft customers and partners, UBS wrote that Azure and Amazon Web Services demand "appears to be very healthy." However, the firm believes capacity constraints for external customers and early efforts to optimize AI token usage could limit the scope for meaningful upside to Azure guidance.
UBS also noted that recent GitHub Copilot pricing changes should provide a modest boost to Azure growth.
The firm raised its fiscal 2027 capital expenditure estimate to $261 billion from $234 billion, citing continued demand from model training workloads and memory cost inflation. It added that investors are increasingly focused on AI infrastructure spending after recent reactions to results from Oracle and Alphabet's Google.
On the productivity software side, UBS became more constructive on Microsoft 365, pointing to Copilot improvements and pricing changes across the Microsoft 365 Commercial Cloud business. The firm increased its fiscal 2027 Microsoft 365 Commercial Cloud growth forecast by 70 basis points to 16.2%.
UBS wrote that Microsoft shares have underperformed many peers this year, leaving investors cautious about rising AI investment, returns on AI spending and exposure to frontier AI models. It estimates investor expectations for fiscal 2027 capital expenditures are already in the $255 billion to $260 billion range.
"In our view, this set-up mitigates the downside risk even if AI capex were to rise and the H2 Azure guide was reaffirmed (not raised)," UBS wrote.
While trimming its price target to $480 from $510 to reflect weaker sentiment toward AI infrastructure stocks, UBS said Microsoft remains reasonably valued based on its AI monetization potential and expectations for steady mid-teens earnings growth.
Shares of Microsoft traded hands at $391 on Monday afternoon, down about 19% so far this year.