Citi has made an adjustment to its price target for Microsoft (NASDAQ: NASDAQ:MSFT), bringing it down to $497 from the previous $500, while keeping a Buy rating on the stock.
The firm's analysis indicated that Microsoft's performance has not been as strong as expected in the last quarter, with challenges such as high capital expenditures and slower-than-anticipated growth in Azure, Microsoft's cloud computing service, due to capacity issues and broader economic factors. Additionally, earnings per share (EPS) growth has been less robust.
The report suggests that while the setup for the first fiscal quarter was mixed, there is potential for a slight positive surprise in the second fiscal quarter, given more moderate investor expectations. This outlook is based on stability shown in various surveys conducted by the firm, including those with Microsoft resellers and chief information officers.
Citi anticipates that confidence in the demand for Azure and AI will increase in the second half of the fiscal year, and expects Microsoft to provide reassuring commentary on capital expenditures and returns. The firm has revised its estimates, slightly lowering its medium-term revenue and EPS projections for fiscal years 2026 and 2027 by approximately 2 percentage points, though they remain slightly above the consensus on the street.
In other recent news, Loop Capital has maintained a Buy rating on the company's stock. The firm anticipates a robust growth trend, driven by an uptick in cloud consumption and IT spending. Microsoft's M365 Copilot and analytics platform, Fabric, are also gaining market traction.
Meanwhile, Evercore ISI maintains an Outperform rating on Microsoft, due to the company's strong fundamentals, particularly in the cloud services sector. The firm expects an increase in Azure AI consumption revenue in the third fiscal quarter. Other firms, such as KeyBanc, have also shown confidence in Microsoft's growth, increasing their price target to $505.00.
In a major development, Microsoft has entered a 20-year power contract with Constellation Energy for the revival of the Three Mile Island nuclear plant, which is set to fuel Microsoft's data centers. This move is part of the company's commitment to powering its AI expansion with carbon-free electricity.
Microsoft has also announced plans to enable customers to create autonomous AI agents starting in November. These agents, designed to perform routine tasks with minimal human intervention, will be developed using Copilot Studio. This initiative is seen as a significant move to leverage the growing AI market.
InvestingPro Insights
While Citi has slightly lowered its price target for Microsoft, the company's financial metrics and market position remain strong. According to InvestingPro data, Microsoft boasts a substantial market capitalization of $3.18 trillion, reflecting its dominant position in the tech industry. The company's revenue for the last twelve months stands at an impressive $245.12 billion, with a robust revenue growth of 15.67% over the same period.
InvestingPro Tips highlight Microsoft's financial strength and market stability. The company "has raised its dividend for 19 consecutive years," demonstrating a commitment to shareholder returns even as it invests heavily in growth areas like Azure and AI. This aligns with Citi's expectation of reassuring commentary on capital expenditures and returns.
Additionally, Microsoft "operates with a moderate level of debt," which provides financial flexibility as it navigates the challenges mentioned in Citi's report, such as high capital expenditures and capacity issues in Azure. The company's strong financial position is further underscored by the fact that its "cash flows can sufficiently cover interest payments."
It's worth noting that Microsoft is currently "trading at a high P/E ratio relative to near-term earnings growth," with a P/E ratio of 36.23. This valuation reflects the market's optimism about Microsoft's long-term prospects, particularly in cloud computing and AI, despite the short-term challenges identified by Citi.
For investors seeking more comprehensive analysis, InvestingPro offers 14 additional tips for Microsoft, providing a deeper understanding of the company's financial health and market position.
This article was generated with the support of AI and reviewed by an editor. For more information see our T&C.