Morgan Stanley has revised its price target for Microsoft (NASDAQ:MSFT), lowering it from $520 to $506 following the tech giant’s latest earnings report.
Microsoft announced plans to increase spending on AI infrastructure this fiscal year despite experiencing slower growth in its cloud business, suggesting that the returns from significant investments in AI technology might take longer to materialize than Wall Street initially anticipated.
MSFT shares fell as much as 7% in after-hours trading, though these losses were later reduced to 1.5%.
Despite its revision, Morgan Stanley analysts maintained an optimistic outlook on Microsoft stock, advising investors “ to take the opportunity to build positions in this long-term winner on the dip.”
Microsoft’s revenues for the fiscal 2025 grew 16% year-over-year to $245 billion, while operating income increased by 22% to $109 billion. EPS rose 20% to $11.80, and free cash flow surged 25% to $74 billion.
However, Morgan Stanley analysts point out that the steep investment ramp has led to higher capital expenditures, which rose from an estimated $63 billion to $78 billion for FY25.
As a result, the firm's FY25 EPS estimate has been adjusted down by 3.0% to $13.06.
Nevertheless, the analysts’ bullishness in Microsoft's long-term potential remains intact.
"Our conviction in Microsoft's ability to effectively monetize against this investment (and not overspend) also rises, given management commentary on the call," the analysts noted.
They emphasized the opportunity ahead for Microsoft, particularly in automating enterprise operating expenses, projecting that Generative AI revenue could reach $67 billion by fiscal 2029 in the base case and $121 billion in the bull case.
“With these projected levels of capex investment and management aligning that investment to current demand trends, our bull case estimates look increasingly probably, in our view,” the analysts wrote.
“With ~23% upside to our $506 price target after-hours, we remain firmly Overweight the clearest AI winner in software,” they added.